What the Fork?

The crypto space is experiencing turbulent days since LUNA started falling from the crypto sky. One of the hottest topics has been the announcement of TerraLuna’s CEO, Do Kwon, who proposed to fork LUNA to ensure some sort of continuation of the prominent chain. While the proposal is still up for debate, we wanted to investigate forks in general and offer some food for thought if a fork of LUNA is something that could reinstate the lost trust.

In programming a fork happens when you update an old code to a new version; in crypto, a fork represents a change in the blockchain’s protocol and creates two potential ways that a blockchain could continue. 

Let’s start with the basics – what is a blockchain protocol?

You can think of a blockchain protocol as software or a set of rules that all its participants need to follow and a blockchain as a simple transaction log running this software.

Every digital currency has its own protocol. It establishes the rules that all its members must agree to if they want to participate in the protocol. These rules determine the size of the chain blocks, mining rewards, fee calculation, etc. The development of a protocol is a never-ending story because there is always room for improvement. Developers are continuously striving to reach a better performance of their blockchain. 

There is a difference between hard forks and soft forks.

Blockchain runs on consensus. When developers agree that their protocol should be tweaked a little bit to achieve better performance, they can implement certain changes to their set of rules and thus create a new version that is still compatible with the older one. All participants can continue using the protocol without having to change their approach or install new software. This kind of change is called a soft fork

However, there are times when a group of developers disagrees with the direction that the current blockchain is taking. If these participants want to go in a new direction, they need to create a new version of the protocol. They achieve this by creating a fork of the existing blockchain. This is what we call a hard fork.

How do they create a hard fork?

Developers need to copy the blockchain protocol code, implement their desired changes and define a point of time (a block number) in which their fork will become active. When the relevant block number is published, the blockchain branches out into two forks, and the community gets split. One group of participants might keep supporting the original protocol code and the other one starts supporting the new version. And voila, we have two blockchain forks. Each community starts adding new blocks to its own fork and therefore, both blockchains become incompatible with each other. 

The distribution of crypto assets

Forks share the same transaction history up to the moment where the split happens. In the event of a fork, holders’ assets are safe. Holders still own the same amount of original coins, but they also receive a specific amount of the new coin issued on the new chain. The distribution can differ from one case to another but in theory the holder shouldn’t experience any losses.

To sum up, anyone who held coins before a fork, and during the fork, therefore will necessarily have coins on both chains after the fork has occurred. 

Potential outcomes of forks

Generally, there are three potential outcomes of hard forks: 

  1. Both blockchains are adopted, but one is favoured. One of the two chains becomes or remains the dominant chain in terms of adoption and value (but the other chain maintains a reasonable level of community support and value, e.g., Bitcoin Cash and Ethereum).
  2. One blockchain becomes dominant, resulting in the other blockchain having low community adoption and/or value.
  3. Both blockchains are adopted, co-existing and operating independently of one another with roughly equal community adoption and/or value.

What about the forks in DeFi?

When talking DeFi, the term “forks” is used a bit more generally. What happens there is that developers can take a part of an original protocol code, tweak it as they like, and use it on their preferred EVM-compatible blockchain. 

DeFi runs on an open-source code. When developers find projects with successful adoption cases, they can easily clone them and deploy them in record time. And since DeFi is based on smart contracts, these platforms can be published on any of the EVM-compatible blockchains. In comparison to hard forks, the blockchain doesn’t split in two. We are actually talking about clones that have been altered to a certain extent and published on a blockchain.

One of the best examples of DeFi forks was Uniswap, a leading decentralized exchange in the market. Uniswap was so successful that it was forked multiple times. New forks of Uniswap tried to incentivize new users by offering them high yields (APYs) and other rewards.  

While certain creators of the original code might find the approach of protocol cloning problematic, the increased competition between platforms usually leads to a better end-product due to the multiple experiments of developers from DeFi’s open protocol culture. Most of the new forks do not withstand the test of time, especially if their sole purpose is the founders’ personal gain. On the other hand, secure products with strong communities, competitive yields, and a long-term roadmap will flourish in the long run. 

Decentralized finances are in their essence fully decentralized and open. They offer a blank canvas to a global pool of talent to continuously improve its use-case in order to achieve mass adoption.

A fork of Terra LUNA

The charts suggest that Do Kwon’s proposal of a new fork didn’t resonate well in the Terra community. In merely 24 hours after the announcement, LUNA’s price had fallen by nearly a quarter and is currently worth $0.000146. Terra’s core team has put in a lot of effort in saving their stablecoin UST which affected the LUNA token gravely. The head of Terra LUNA is dabbling with the possibility of building a new chain that would entirely cut out its failed TerraUSD and instead focus on decentralized finance applications building on Terra.

Kwon’s team proposed a plan where the current blockchain would continue as Terra “Classic”. Holders of LUNA on the “Classic” chain would receive token airdrop on the new chain fork, which could be launched as soon as May 27th, according to Kwon.

The community has mixed feelings about the fairness of the proposed plan. While some are welcoming the fork approach, others do now see the airdrop proposal just. They are pointing out that there have been many new investors in LUNA since the token started its downfall and that these new investors should not obtain equal status to the long-term holders of LUNA in the case of an airdrop. While it is true that the arguments of the long-term LUNA holders are strong, every crypto investor needs to consider the risks of the crypto market and be prepared to play by its rules. Even when they might not seem fair.

Final thoughts

Hard forks or soft forks are the preferred protocol upgrade mechanism of the current blockchain space. On one hand, hard forks offer developers a lot of flexibility in upgrading the protocol, as they do not have to make sure that the new rules “fit into” the old rules. On the other hand, soft forks are more convenient for users, because they do not require any upgrades to stay on the chain and are less likely to lead to a chain split. 

There have been numerous discussions if one type of fork is more dangerous than the other. Some say that hard forks are coercive and can be seen as “hostile takeovers” of a network. You can stick to the original chain and risk it being discontinued or opt for the new chain and accept the new rules. But Vitalik argues that it’s the soft forks that are in fact the more dangerous ones. Because you do not have to agree to the update to set it in motion. Vitalik explains: “Hard forks are opt-in, whereas soft forks allow users no “opting” at all. In order for a user to join a hard forked chain, they must personally install the software package that implements the fork rules, and the set of users that disagrees with a rule change even more strongly than they value network effects can theoretically simply stay on the old chain.”

In any case, the crypto space is still a very young concept, and every scenario helps the community to build a more stable, reliable, and safer ecosystem. Open discussions are of utmost importance and the decentralized open-source approach of blockchain structure offers all the necessary components to create strong pillars for the future. 

Every trial situation will give us a precedent for future events. The question of LUNA’s fork and its airdrop distribution may serve as the basis for numerous other forks to come. It is why we would like to leave you with one final question: If you oversaw the airdrop distribution on the new LUNA fork, how would you make it fair?

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