Bitcoin is soaring! This article reveals investment risks from the perspective of fork analysis

Since Bitcoin Cash (BCH) successfully hard forked on August 1, 2017, various Bitcoin hard forks such as Bitcoin Gold (BTG) , Bitcoin Diamond (BTD) , Lightning Bitcoin (LBTC) , etc. have emerged one after another, making people dizzy and not knowing which one to buy. Many people also took the opportunity to make a fortune, and even a new term IFO (Initial Fork Offering) was created. This chaos similar to the ICO at the beginning of the year has forced people to think: What is the future of Bitcoin?

What is a fork?

Forking is a common phenomenon caused by Bitcoin's proof-of-work (PoW) mechanism. Under the proof-of-work mechanism, all mining nodes (full nodes) are packaging transactions and calculating hashes to generate blocks. Ideally, one node will first generate a qualified block (block 3 in the figure below) and broadcast it to the entire network. After being accepted by other nodes, the block will be officially included in the chain, and then all nodes will continue to generate new blocks (mining) after the qualified block (block 3 in the figure below) , so that a blockchain can be continuously generated.

However, the reality is cruel. Since each node works independently, it is inevitable that two or more blocks will generate qualified blocks almost at the same time. They will broadcast their generated blocks to the entire network. After receiving these blocks, other nodes will see the status shown in the figure below. The node can only arbitrarily choose one of the blocks 3A or 3B to mine after it. Obviously, the blocks selected by different nodes cannot be exactly the same, thus forming two different blockchains (see the figure below) . This situation is called a fork .

Since the computing power on the two chains is not completely equal, the chain with higher computing power will generate blocks faster, and soon the two chains will be of different lengths. According to the Bitcoin consensus mechanism, the node must choose the longest chain and mine after it, while discarding all blocks on the shorter chain. This is Bitcoin's "longest chain rule". This solves the fork problem and restores a single Bitcoin blockchain.

What are hard forks and soft forks?

Both hard forks and soft forks are special cases of forks, which only occur when the consensus algorithm (or parameters) of Bitcoin changes. If not all nodes agree with the change in the consensus algorithm, they will not agree with the blocks generated by the other party.

When the requirements of the new consensus algorithm are stricter than those of the old algorithm, the blocks generated by the new nodes can be accepted by the old nodes that have not been upgraded, but the blocks generated by the old nodes will be rejected by the new algorithm nodes, and a fork will be formed.

When the computing power of the new algorithm node is higher than that of the old node, according to the longest chain rule, the old node will abandon its own chain and accept the chain generated by the new node, thus eliminating the fork and restoring a single blockchain (see the figure below) . Therefore, this situation is called a soft fork.

On the contrary, if the blocks generated by the new node are not accepted by the old nodes that have not been upgraded (for example, the block limit is increased from 1MB to 8MB) , this will form another fork situation. In the situation shown in the figure below, the new node sees the blockchain with 5 blocks on it, while the old node only sees the blockchain with 4 blocks on it, and cannot see the blockchain with 5 blocks on it. At this time, the longest chain rule cannot work, and the fork cannot be restored. The two chains are completely separated, forming two completely different Bitcoins (new green Bitcoin and old blue Bitcoin) . This situation is called a hard fork. It can also be seen from the figure that the two Bitcoins of the hard fork shared the same blockchain before the fork position, which is also an important difference between forked coins and altcoins. Altcoins are separated from Bitcoin from the genesis block.

Which is the real Bitcoin?

After the hard fork occurs, the forked coins become independent of each other and are no longer the same digital currency. However, since they share Bitcoin’s historical data, the Bitcoin obtained by users before the fork exists on both forks at the same time. From this perspective, they can both be called “Bitcoin”, and Bitcoin that follows the Bitcoin Core consensus algorithm has no privilege to prohibit other forked coins from calling themselves “Bitcoin”.

In order to distinguish and avoid confusion, the market has given conventional names to all forked coins on the market, such as Bitcoin Segwit1X (BT1) developed by the BitcoinCore team, Bitcoin Cash (BCH) developed by the Bitcoin ABC team, etc. Since BT1 has a much higher computing power than other forked coins, it is customary to call BT1 Bitcoin. However, due to the excellent characteristics of many forked coins, it is still unknown which one will be recognized by the market in the end.

How to deal with IFO?

First of all, since the coins obtained before the hard fork are legal on different forks, that is to say, one Bitcoin before the fork is split into two after the fork, becoming two different "Bitcoins". This gives everyone an opportunity to make money, which is also one of the reasons for the recent surge in Bitcoin prices, because many people rushed to buy Bitcoin before the successive hard forks and waited for the "birth".

Secondly, we must realize that it is impossible for all forked coins to survive. Just like ICO coins, the vast majority of forked coins will return to zero, especially some forked coins whose source code is not public, have pre-mining behavior, and significantly change the basic consensus of Bitcoin. Ordinary users are not recommended to invest in them.

Third, on the basis of fully understanding the characteristics of each forked coin, make good asset allocation. The author recommends adopting a simple allocation strategy, using a 1:1 ratio for allocation between various forked coins, without favoring any one forked coin. Because no matter how the price of a single forked coin rises or falls, the sum of the prices of all forked coins is the true price of Bitcoin, and the long-term positive trend of Bitcoin has not changed so far.

In short, no matter how hard forked, Bitcoin is still Bitcoin, and its essence has not changed. Hard forks are just continuous trial and error in the evolution of Bitcoin itself, and the market will choose an optimal evolutionary path for it. No matter which forked coin is ultimately successful, it is the success of Bitcoin, and the price of Bitcoin will eventually reach a consensus with its value, which is beyond doubt.