On July 31, a Chinese Bitcoin investor sued local crypto exchange OKCoin for allegedly blocking him from getting his Bitcoin Cash (BCH) after the Bitcoin fork.
While the case is new for China, compilations regarding hard forks and exchanges have been amassing since perhaps as early as the DAO incident in 2016. So what happens when you have a coin that is about to be split into two, but you’re holding it on an exchange’s hot wallet?
What’s a hard fork?
Essentially, a hard fork is a change to the cryptocurrency’s protocol that makes previously invalid blocks/transactions valid — and vice versa — and therefore requires all users to upgrade to the latest version. In other words, a hard fork splits the path of the asset’s underlying blockchain, wherein the upgraded, separated blocks start following new sets of rules. Simply put, it’s the equivalent of a ‘reset’ button. There’s also a soft fork, which entails a change of protocol as well, although such forks can still work with older versions.
Why launch a hard fork at all? Basically, it can be initiated to correct security risks found in older versions of the software, to add new functionality or to reverse transactions. The latter, for instance, was the reason for the infamous DAO hard fork, which will be described in greater detail in the next section.
According to data obtained from Forkdrop.io, there are currently 116 forks, 74 of which are affiliated with Bitcoin. There are major ones, like Bitcoin Cash (BCH), Ethereum Classic (ETC) or Bitcoin Gold (BGD), that compete with the top coins and are commonly listed on the largest exchanges — they rank 4th, 12th and 24th respectively, as per Coinmarketcap. There are also smaller ones that are worth just a few cents, and are hence less likely to be featured on large platforms. Charlie Lee, the creator of Litecoin who previously worked at Coinbase, described how the platform would approach forks in the past:
“With the ETC and BCH hard forks, it was clear that those two coins will be the minority fork, so it was safe to use a wait-and-see approach. So Coinbase didn’t support those forks initially. And only if there was traction on those forks would Coinbase spend the time and resources to support those forks and let people access their coins on the minority chain.”
The DAO example: To fork or not to fork?
The DAO was set up in April 2016 as a decentralized autonomous organization. Its purpose was to invest in other businesses, making it a form of an investor-directed venture capital fund, powered by smart contracts. The prominent project swiftly gathered a record-breaking $120 million in Ethereum (ETH) during the fundraising stage.
However, in June, some users exploited a vulnerability in the DAO code that allowed them to drain one-third of the DAO’s funds (roughly $50 million) to a subsidiary account. It wasn’t a hack, per se, as the attackers simply found a loophole in the coding — as one of the alleged participants soon declared, he merely used the possibilities of the DAO code.
That lead to a debate in the community, where members effectively took two sides: Some argued that the vulnerability was unfair and their funds should be given back, while others opined that the whole purpose of a smart-contacts-based system is its inviolability and, hence, no manual adjustments should take place. The community voted in favour of the refund (the results can be seen here), and the Ethereum team performed a hard fork. The hacked funds were sent to an account available to the original owners. The token owners were given an exchange rate of 1 ETH to 100 DAO tokens, as per the initial offering conditions.
However, the part of the community that rejected the intervention and favored immutability decided to keep using the unforked version of Ethereum: Ethereum Classic (ETC). ETC held on to the existing Ethereum blockchain and did not implement the hard fork code to ‘undo’ the DAO attack. As the…
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