A new trend is beginning to emerge in the crypto fundraising world as many new project developers are turning to the hard fork rather than a traditional ICO for financial investment.
The term fork means a new change in the fundamental protocol of the cryptocurrency, thus creating a new version while still having the original there as well. There is no financial advantage to be gained by forking a cryptocurrency as it is purely driven to alter the protocol. Therefore, investors holding a currency which is forked still retain full value but it may well be split into two pots – unlike a single pot before the fork.
The best example is Bitcoin Cash, this was a pure fork of Bitcoin with larger blocks. Yet, although the size of the blocks was increased, there was no monetary benefit to the developer. But, if you take Bitcoin Gold which includes elements of premining and developers starting from a specified point in the chain and then mine blocks from there, you can see that there was some financial gain. Whilst, it is a fork in some ways, this second example is not a pure fork.
The main advantage is that there is an existing and established user base already in place with users freely able to claim their tokens/coins. Naturally, there are pros and cons, for example if investors choose to offload all their new coins this could result in the value of mined coins falling through the floor. Therefore, creating a horrendous situation for the developer trying to raise funds via a combination of pre-mined and fork. This could not happen with a pure fork because as mentioned, there is no monetary gain – only a change to the system, not the currency itself.
Due to world governing bodies not having any frameworks in place to effectively regulate ICOs, initial coin offerings have faced a lot of criticism over the past few years. In theory, as a fork is more the about distribution of free tokens, it is quite possible that regulators will view them far more positively. Yet, it must be stressed, that any crypto currency can crash so there will always be an element of risk attached.
Clearly, regulators should be far more concerned by rogue operators (scammers) looking to raise funds through an ICO and then running off with the money. We have seen the SEC take action against plenty of ICOs it believes were offering securities-based tokens. In South Korea, strict ICO regulations have been imposed, yet trading of crypto currencies has been allowed to continue.
Logic tells us, when you choose to fork a cryptocurrency, it should be one that holds a large user base and with the largest market capitalization. Unfortunately, with the successful fork of Bitcoin Cash, it has created several further off-shoots such as Bitcoin Gold, Bitcoin Silver, Super Bitcoin and Bitcoin Diamond. So many forks are unnecessary and the problem will likely escalate if the currency’s value continues to increase. Several industry experts agree that too many forks are a bad thing as it causes confusion in the marketplace and it discredits the original idea of there being a limited number of Bitcoins because you can fork and create double again.