A chain split occurs when developers build an independent coin based on the code of an established blockchain, leading to a separation, or split, from the original parent project. This is possible because many cryptocurrencies, especially those developed in the early years of blockchain technology, are open-source projects. This means that their codebase is readily accessible to all users, enabling developers to adapt the code and fork from them, rather than having to develop a coin from scratch. When a split happens, the new project develops independently from the original coin. Today, some prominent cryptocurrencies are actually forks from the original cryptocurrencies like Bitcoin, such as Litecoin and Bitcoin Cash.
Reasons for Chain Splits
There are a number of reasons for chain splits. Some developers may think that the technology in the original cryptocurrency is moving too slowly to cater to demands; hence, they believe that certain technical improvements may improve the coin’s uptake. This resulted in the split of Litecoin (LTC) from Bitcoin (BTC), so that the former was able to fix existing software or hardware issues. In addition, the new fork could improve the existing technology to facilitate a quicker block generation time, increasing the supply of coins with a different hashing algorithm.
As blockchain evolves, developers on a single blockchain may have ideological differences as to the way the blockchain should develop, or regarding applications of the blockchain. These can lead to a chain split, with each developer evolving the coin in their own way. This occurred with the split of Bitcoin Cash (BCH) from BTC, due to conflicting ideas on how the leading cryptocurrency should continue to scale. It also occurred with the split of Ethereum Classic (ETC) from Ethereum (ETH) due to differences in opinion over whether developers could amend the data on the blockchain to return stolen coins to their owners. A chain split may offer a better way to improve the security of an existing blockchain as well.
Chain splits may also occur as a joke, as in the case of Dogecoin (DOGE), which was a split from LTC. Originally inspired by an internet meme, DOGE managed to reach over $2 billion in market capitalization at one time.
Types of Chain Splits
When a chain splits, two types of forks can occur: hard fork and soft fork. A hard fork refers to a significant change in the original blockchain network, which results in a direct, immediate separation from the chain. The new token will no longer be compatible with the blockchain it split from. A soft fork, however, does not create a split from the existing chain, but improves it with new rules and features. Hence, it remains “backward compatible,” unlike a hard fork. However, a hard fork may still occur when differences are irreconcilable.
Negative Effects of Chain Splits
Although chain splits are generally viewed as a way of improving existing blockchain technologies and possibly earning more income from them, there are also negative effects that can result from them. These include confusion among users, disruption to existing investments, and a loss of investor confidence due to centralization.
Regardless of the reason for a chain split, even if it’s for the improvement of an existing blockchain, users may be left confused as to which blockchain they should continue to invest in. Also, there may be existing policies and projects that are underway during the split. This could cause disruption with the plans, as resources and developers are being distributed due to the split. With the hash power being distributed among two blockchains along with the split, there’s a risk of centralization when the hash power is reduced, hence also increasing the risk of monopoly. This will cause a loss in user and investor confidence, which forms a threat to the blockchain sector as a whole.