Getting the handle on three upcoming crypto hard forks
By Carine Lee
Updated
Hard fork is easy to say but more difficult to explain and with three on the crypto horizon Capital.com took a look at what is happening and why they are important.
Two major chains are on the cusp of a hard fork: Ethereum’s (ETH) is finally going ahead with The Merge, while Cardano’s (ADA) is readying its Vasil upgrade.
Decred on the other hand recently completed its own hard fork with an interesting impact on its price, meaning cryptocurrency watchers are keep a close eye on ADA and ETH.
ETH to US dollar
Blockchain technology requires different parties to agree to maintain the history of a blockchain. When parties do not agree, a hard fork can follow.
Both bitcoin cash and ethereum classic are the result of a hard fork, where participants stuck with the original source code.
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What’s a hard fork?
A hard fork is a radical change to the blockchain protocol. It creates two separate blockchains, while a soft fork leaves one.
The most talked about hard fork currently is the Ethereum blockchain’s Merge.
The Merge
Ethereum has recently completed its final test prior to The Merge with the successful Goerli testnet implementation.
ETC to US dollar
The successful test has moved the network closer to the full transition, which will see the current Ethereum Mainnet integrate with the Beacon Chain proof-of-stake system.
The Merge is finally imminent.
The Merge is expected to take place on 19 September and it will greatly reduce Ethereum’s energy consumption.
This is because it will switch from proof of work to a proof-of-stake system.
However, miners are less keen about the proof-of-stake system, as the proof-of-work system gets them paid no matter whether the price of ETH is up or down.
According to Kaiko, the ETC has outperformed forks such as BTC and ETH year to date.
ETC investors seem to be either betting on a failed, delayed or an improved Merge with the arrival of more miners.
In the past week however, ETC has retraced its gains and fallen over 20% as a delayed Merge seems less and less likely by the day.
Market liquidity
ETH’s market share of weekly trade volume hit its highest level since 2018, exceeding its previous peak of 55% during the May 2021 sell-off.
The volume market share of ETH-USD relative to BTC-USD aggregated on 10 exchanges has surged from 38% mid-July 2022 to 57% last week.
The main driver of ETH trading activity in July has been the increased optimism around the Merge and an improvement of global risk sentiment, according to Kaiko.
However, last week’s sell-off across markets confirms that ETH remains a higher beta play as risk sentiment soured, ETH lost 17% of its value.
Overall, the average weekly trade volume is down significantly relative to last year’s average.
Looking at market depth aggregated across the same exchanges, Ethereum’s market depth has been on a downward trend since early August, falling by 23% to around 45,000 ETH.
On Friday alone the 2% ETH-USD market depth plummeted by 10% as market makers adjusted their positions amid a wider market sell-off.
ADA to US dollar
Vasil hard fork
Cardano founder and Input Output CEO Charles Hoskinson said the Vasil hard fork will provide a “massive performance improvement to Cardano and its smart contract capabilities.”
Smart contracts enable transactions to be agreed upon and completed automatically behind the scenes.
It is thought that Cardano’s hard fork will set itself apart from others as it allows for the use of reference scripts that accelerate and increase smart contracts.
In a recent crypto conference in California, Hoskinson said that the Vasil hard fork would not experience any further delays.
University of Toronto finance professor Andreas Park said that a hard fork is usually a positive development, when speaking to Capital.com.
The professor specializes in blockchain and crypto said the blockchain world requires people to be on the same page, and the Vasil hard fork would be a display of communal effort.
DCR to US dollar
Decred hard fork
Decred is an example of why hard forks are so keenly watched by the crypto sector. It went through a hard fork back in May, and on 5 August and there was an immediate price impact.
It started the day at about $26 and in less than two hours in the afternoon it jumped about 30%, rising from about $40 to $60.
Decred, which copied bitcoin’s code, modified it as a means of empowering and rewarding holders who contribute changes to the network.
It deploys a hybrid-consensus model which utilizes both proof-of-work and proof-of-stake systems to increase the token’s value, while other cryptos use either one of the systems.
The Decred hard fork also received the backing of crypto exchanges Binance and Bybit.
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