{{Short description|Event in a blockchain}} In [[blockchain]], a '''fork''' is defined variously as:
* "What happens when a [[blockchain]] diverges into two potential paths forward", * "A change in protocol", or * A situation that "occurs when two or more blocks have the same block height".<ref name="mastering">{{cite book|last1=Antonopoulos|first1=Andreas|title=Mastering Bitcoin: Programming the Open Blockchain|date=2017|publisher=O' Reilly media, inc.|location=USA|isbn=978-1491954386|page=Glossary|edition=2}}</ref>{{rp|glossary}}{{efn|Alternatively, this situation is called a ''blockchain split''<ref>{{cite news|last1=Thieme|first1=Nick|title=Bitcoin Has Split Into Two Cryptocurrencies. What, Exactly, Does That Mean?|url=http://www.slate.com/blogs/future_tense/2017/08/04/explaining_bitcoin_s_split_into_two_cryptocurrencies.html|access-date=8 March 2018|work=Slate|date=4 August 2017|archive-date=8 March 2018|archive-url=https://web.archive.org/web/20180308165911/http://www.slate.com/blogs/future_tense/2017/08/04/explaining_bitcoin_s_split_into_two_cryptocurrencies.html|url-status=live}}</ref> or a ''blockchain divergence''.<ref>{{Cite book|title=Blockchain Quick Start Guide|last1=Wu|first1=Xun (Brian)|publisher=Packt Publishing Ltd.|year=2018|isbn=978-1-78980-797-4|location=Birmingham|pages=21|last2=Sun|first2=Weimin}}</ref> If permanent, it is also referred to as a ''cryptocurrency split''.}}
Forks are related to the fact that different parties need to use common rules to maintain the history of the blockchain. When parties are not in agreement, alternative chains may emerge. While most forks are short-lived some are permanent. Short-lived forks are due to the difficulty of reaching fast [[Consensus (computer science)|consensus]] in a distributed system. Whereas permanent forks (in the sense of protocol changes) have been used to add new [[software feature|features]] to a blockchain, they can also be used to reverse the effects of [[computer hacking|hacking]] such as the case with [[Ethereum]] and [[Ethereum Classic]], or avert catastrophic [[software bug|bugs]] on a blockchain as was the case with the [[bitcoin]] fork on 6 August 2010.{{citation needed|date=May 2019}}
Blockchain forks have been widely discussed in the context of the [[bitcoin scalability problem]].<ref name="onscaling">{{cite book |last1=Croman |first1=Kyle |last2=Eyal |first2=Ittay |title=Financial Cryptography and Data Security |date=2016 |chapter=On Scaling Decentralized Blockchains |chapter-url=http://www.comp.nus.edu.sg/~prateeks/papers/Bitcoin-scaling.pdf |series=Lecture Notes in Computer Science |volume=9604 |pages=106–125 |doi=10.1007/978-3-662-53357-4_8 |isbn=978-3-662-53356-7 |access-date=28 March 2019 |archive-date=1 May 2019 |archive-url=https://web.archive.org/web/20190501113357/https://www.comp.nus.edu.sg/~prateeks/papers/Bitcoin-scaling.pdf |url-status=live }}</ref><ref name="hopesto">{{Cite news |url=https://www.vice.com/en/article/bitcoin-unlimited-hopes-to-save-bitcoin-from-itself-block-size/ |title='Bitcoin Unlimited' Hopes to Save Bitcoin from Itself |author=Jordan Pearson |access-date=17 January 2017 |date=14 October 2016 |work=Motherboard |publisher=Vice Media LLC |archive-date=18 January 2017 |archive-url=https://web.archive.org/web/20170118075749/http://motherboard.vice.com/read/bitcoin-unlimited-hopes-to-save-bitcoin-from-itself-block-size |url-status=live }}</ref><ref name="businessinsider20170326">{{Cite news |url=http://www.businessinsider.com/bitcoins-hard-fork-bitcoin-unlimited-segregated-witness-explained-2017-3 |title=A Bitcoin civil war is threatening to tear the digital currency in 2 — here's what you need to know |author=Oscar Williams-Grut and Rob Price |access-date=2 July 2017 |date=26 March 2017 |work=Business Insider |archive-date=2 July 2017 |archive-url=https://web.archive.org/web/20170702033238/http://www.businessinsider.com/bitcoins-hard-fork-bitcoin-unlimited-segregated-witness-explained-2017-3 |url-status=live }}</ref>
== Types of forks == Forks can be classified as ''accidental'' or ''intentional''. ''Accidental fork'' happens when two or more [[Bitcoin network#Mining|miners]] find a block at nearly the same time. The fork is resolved when subsequent block(s) are added and one of the chains becomes longer than the alternative(s). The network abandons the blocks that are not in the longest chain (they are called ''orphaned'' blocks).
Intentional forks that modify the rules of a blockchain can be classified as follows:
=== Source code fork === {{See also|Fork (software development)}} A ''source code fork'' or ''project fork'' is when developers take a copy of source code from one cryptocurrency project and start '''independent''' development on it, creating a separate and new piece of blockchain. Such examples are; [[Litecoin]] a source code fork of [[Bitcoin]], [[Monero]] fork of Bytecoin and [[Dogecoin]] fork of Litecoin.
=== Hard fork === A ''hard fork'' is a change to the blockchain protocol that is not backward compatible and requires all users to upgrade their software in order to continue participating in the network. In a hard fork, the network splits into two separate versions: one that follows the new rules and one that follows the old rules.
For example, Ethereum was hard forked in 2016 to "make whole" the investors in [[The DAO (organization)|The DAO]], which had been hacked by exploiting a vulnerability in its code. In this case, the fork resulted in a split creating Ethereum and [[Ethereum Classic]] chains. In 2014, the [[Nxt]] community<ref name="ArsFork">{{cite web|last=Lee|first=Timothy|title=Major glitch in Bitcoin network sparks sell-off; price temporarily falls 23%|url=https://arstechnica.com/business/2013/03/major-glitch-in-bitcoin-network-sparks-sell-off-price-temporarily-falls-23/|publisher=Arstechnica|date=12 March 2013|archive-url=https://web.archive.org/web/20130420050926/http://arstechnica.com/business/2013/03/major-glitch-in-bitcoin-network-sparks-sell-off-price-temporarily-falls-23/|archive-date=20 April 2013|url-status=live|access-date=25 February 2018}}</ref> was asked to consider a hard fork that would have led to a rollback of the blockchain records to mitigate the effects of a theft of 50 million NXT from a major [[cryptocurrency exchange]]. The hard fork proposal was rejected, and some of the funds were recovered after negotiations and ransom payment. Alternatively, to prevent a permanent split, a majority of nodes using the new software may return to the old rules, as was the case with Bitcoin split on 12 March 2013.
A more recent hard-fork example is of Bitcoin in 2017, which resulted in a split creating [[Bitcoin Cash]].<ref name="bpr">{{Cite news |last=Smith |first=Oli |date=21 January 2018 |title=Bitcoin price RIVAL: Cryptocurrency 'faster than bitcoin' will CHALLENGE market leaders |work=Express |url=https://www.express.co.uk/finance/city/907536/cryptocurrency-bitcoin-market-leader-cash-ripple-ethereum |access-date=6 April 2021 |archive-date=28 March 2019 |archive-url=https://web.archive.org/web/20190328143053/https://www.express.co.uk/finance/city/907536/cryptocurrency-bitcoin-market-leader-cash-ripple-ethereum |url-status=live }}</ref> The network split was mainly due to a disagreement in how to increase the transactions per second to accommodate for demand.<ref name="CNN 2017-08-01">{{cite news |url=https://money.cnn.com/2017/08/01/technology/business/bitcoin-cash-new-currency/index.html |title=Bitcoin split in two, here's what that means |work=[[CNN]] |date=2017-08-01 |access-date=2021-04-07 |archive-date=2018-02-27 |archive-url=https://web.archive.org/web/20180227214042/https://money.cnn.com/2017/08/01/technology/business/bitcoin-cash-new-currency/index.html |url-status=dead }}</ref>
=== Soft fork === A ''soft fork'' is a backward-compatible change to the blockchain protocol that allows new rules to be introduced without requiring all users to upgrade their software. In a soft fork, a majority of the network’s miners implement the new rules and begin following the updated version of the blockchain. The rest of the network can continue to follow the blockchain, but they will be unable to validate that new blocks follow the updated rules. Because a soft fork is backward-compatible, it does not result in the creation of a new blockchain or the splitting of the network. Instead, it allows the network to gradually transition to the new rules while still maintaining compatibility with the old rules.<ref name="CNN 2022-12-24">{{cite news |url=https://www.cryptocurrencytick.com/what-is-fork/ |title=What is Fork? Fork in 3 Title |work=[[CryptocurrencyTick]] |date=2022-12-24 |access-date=2022-12-24 |archive-date=2022-12-25 |archive-url=https://web.archive.org/web/20221225150202/https://www.cryptocurrencytick.com/what-is-fork/ |url-status=live }}</ref>
== Cryptocurrency splits == A ''permanent chain split'' is described as a case when there are two or more permanent versions of a blockchain sharing the same history up to a certain time, after which the histories start to differ.<ref name="ATOchainsplits">{{Cite web|url=https://www.ato.gov.au/General/Gen/Tax-treatment-of-crypto-currencies-in-Australia---specifically-bitcoin/?page=2#Chainsplits|title=Transacting with cryptocurrency|access-date=2019-10-11|website=ato.gov.au|publisher=Australian Taxation Office|archive-date=2018-09-10|archive-url=https://web.archive.org/web/20180910031808/https://www.ato.gov.au/General/Gen/Tax-treatment-of-crypto-currencies-in-Australia---specifically-bitcoin/?page=2#Chainsplits|url-status=dead}}</ref> Permanent chain splits lead to a situation when two or more competing cryptocurrencies exist on their respective blockchains.<ref name="ATOchainsplits" />
=== Taxation === The taxation of cryptocurrency splits varies substantially from [[nation state|state]] to state. A few examples include:
==== Australian Taxation Office (ATO) ==== The [[Australian Taxation Office|ATO]] does not classify cryptocurrency splits as taxation events.<ref name="ATOchainsplits" /> The ATO classifies the versions of the blockchain coming from the splits as the "original blockchain" and the "new blockchain"{{clarify|incomplete sentence|date=September 2021}}. In relation to the cost base, the cryptocurrency on the original blockchain should be assigned all the original cost base, while the cryptocurrency on the new blockchain should be assigned cost base zero.<ref name="ATOchainsplits" />
==== HM Revenue & Customs (HMRC) ==== The UK [[HM Revenue & Customs|HMRC]] does not classify cryptocurrency splits as taxation events. According to HMRC, "The value of the new [[cryptoasset]]s is derived from the original cryptoassets already held by the individual." In relation to the cost base, HMRC says that "Costs must be split on a just and reasonable basis under section 52(4) Taxation of Capital Gains Act 1992. HMRC does not prescribe any particular apportionment method. HMRC has the power to enquire into an apportionment method that it believes is not just and reasonable."<ref name="HMRCsplits">{{Cite web|url=https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-for-individuals|title=Cryptoassets for individuals|date=2018-12-19|access-date=2019-10-11|website=www.gov.uk|publisher=HM Revenue & Customs|archive-date=2018-12-19|archive-url=https://web.archive.org/web/20181219160232/https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-for-individuals|url-status=live}}</ref>
As of September 2021, it is believed that more than 2.3 million people in the UK own a cryptoasset. As these assets do not physically exist, HMRC has been forced to issue guidance stating that cryptoassets will follow the residence of the beneficial owner. Residents in the UK who trade cryptoassets, no matter where these assets are "held", will be liable to UK taxes. However, there is a growing belief that this guidance may well be challenged in the courts. This could impact future HMRC tax income from those not domiciled in the UK for tax purposes."<ref name="Taxing cryptoasset profits">{{Cite web|url=https://www.wilkinssouthworth.co.uk/articles-seminars/taxation-of-cryptoassets|title=Taxing Cryptoasset Profits|date=2021-09-01|access-date=2021-09-01|website=www.wilkinssouthworth.co.uk|publisher=Wilkins Southworth|archive-date=2022-03-02|archive-url=https://web.archive.org/web/20220302154353/https://www.wilkinssouthworth.co.uk/articles-seminars/taxation-of-cryptoassets/|url-status=live}}</ref>
==== Internal Revenue Service (IRS) ==== The [[Federal government of the United States|US]] [[Internal Revenue Service]] (IRS) classifies cryptocurrency splits as "airdrops" and as taxable events. According to the guidance published by IRS, provided the taxpayer is in possession of the keys, they are obliged to pay tax for the new cryptocurrency using the fair market value of the cryptocurrency as their income.<ref>{{Cite web|url=https://www.irs.gov/pub/irs-drop/rr-19-24.pdf|title=26 CFR 1.61-1: Gross income.|access-date=2019-10-11|website=www.irs.gov|publisher=Internal Revenue Service|year=2019|archive-date=2019-10-11|archive-url=https://web.archive.org/web/20191011130554/https://www.irs.gov/pub/irs-drop/rr-19-24.pdf|url-status=live}}</ref><ref>{{Cite news|title=Cryptocurrency Investors Get New IRS Income-Reporting Rules|url=https://www.bloomberg.com/news/articles/2019-10-09/cryptocurrency-investors-get-new-irs-income-reporting-rules|last1=Davison|first1=Laura|date=9 October 2019|access-date=11 October 2019|work=Bloomberg|last2=Versprille|first2=Allyson|archive-date=11 October 2019|archive-url=https://web.archive.org/web/20191011130547/https://www.bloomberg.com/news/articles/2019-10-09/cryptocurrency-investors-get-new-irs-income-reporting-rules|url-status=live}}</ref>
== See also == * [[List of bitcoin forks]]
== Notes == {{notelist}}
== References == {{reflist}}
{{Cryptocurrencies|state=expanded}}
[[Category:Blockchains]]