In the wonderful work of blockchain technology and cryptocurrency you may have come across the terms “hard fork” and “soft fork”. They represent a change in the underlying code that makes up the blockchain. This is what creates changes to how transactions are handled, which can have an effect on mining power, security, and functionality.
Despite having similar names, the features of these two differ significantly. We break it down.
- Cryptocurrency Forks occur when changes are made to a blockchain that affect its functionality in some way
- Hard forks create a new, separate blockchain that operates adjacently to the existing blockchain
- Soft forks continue to be backward compatible, meaning new blocks can still work with old blocks
What is a “fork”?
A blockchain fork works by making changes to the software protocol of the blockchain. New cryptocurrencies are typically created in two ways, either created from scratch or forked from an existing crypto blockchain network.
The goal of soft forks is to make minor changes without disrupting anything currently established with the blockchain.
Hard forks go deeper than soft fork updates by changing more than just how transactions work; they also affect things like block production time or coin distribution rate.
Why do hard and soft forks occur?
Unlike in banking institutions or other financial software, cryptocurrencies have no central authority to decide when to push out updates or new features.
So to get around this, developers on the network must reach a consensus (i.e. a general agreement). Forks, in whatever form, are this consensus mechanism.
There are a variety of reasons these can occur. For soft forks, the goal is usually to implement some new feature or fix a bug. For hard fork updates, they are much more significant and may be used for things like fixing security issues in order to improve the network’s integrity overall.
Of course, hard forks can also happen when there is disagreement about how the blockchain should operate.
Bitcoin Cash hard fork
Probably the most well-known example to date of a blockchain hard fork is the Bitcoin Cash fork that occurred in 2017. This fork saw Bitcoin split into two separate blockchains: Bitcoin (BTC) and Bitcoin Cash (BCH). This occurred due to a disagreement within the Bitcoin community on how to effectively scale the digital currency. A large section of community members believed Bitcoin should be a store of value as opposed. proponents in favour of Bitcoin Cash believed Bitcoin true purpose was as a medium of exchange and therefore required an increased block size in order to handle more transactions per second (TPS). Bitcoin Cash became a forked network as a result of this.
What are the key features of a hard fork?
A blockchain hard fork is a permanent divergence in the blockchain, and computers (nodes) running the previous version will no longer be accepted by any new version. This occurs when any new rules made on the blockchain are incompatible with old rules.
All blocks mined after the split on all blockchains are considered as valid chains in their own right. Multiple blockchains now exist, each with its own set of rules. The chain up until the fork continues to exist and that history remains intact, but all blocks after the fact will differ on each chain.
Hard forks aren’t overly common as they do dramatically and irrevocably alter a network, but almost all cryptocurrencies have been subject to them. For example, in August of 2021, Ethereum rolled out a controversial hard fork referred to as the “London Hardfork”. The change was designed to make transaction fees less volatile and more predictable but may have negative ramifications for miners.
What are the key features of a soft fork?
Unlike a hard fork, blocks on a blockchain network that were made following a soft fork continue to be valid on both chains. Another way of saying this is that they are backward-compatible. New blocks are still compatible with old ones.
It’s important to note, users who are not upgraded will not be able to make use of the newly created blocks. Once they have upgraded, however, they’re able to recognise both old and new blocks.
To explain this in simpler terms, we’ll discuss upgrading your gaming console (e.g. Xbox or Playstation). Old games continue to be compatible with the new software, but not vice versa.
You can think of a soft fork as upgrading your gaming console: old games continue to be compatible with the new console, but not vice versa.
Soft forks are what is used most often as they do not dramatically alter the network, but rather makes it more usable or efficient in some way.
How do forks impact cryptocurrencies?
If you are an end-user of cryptocurrency what you may find most pertinent is how forks actually affect cryptocurrencies.
Typically, a hard fork creates duplicate coins. This means you will have two coins, one from the original blockchain and an upgraded version of this coin after a hard fork occurs. For example, one of the most notable hard forks was the Bitcoin Cash (BTC) fork which was created following the Bitcoin blockchain hard fork. This co-exists with Bitcoin Core (BTC) rather than replacing it.
It is important to note that soft forks do not result in these duplicate coins but rather it retains both sets of transactions within its blocks.
The price of cryptocurrencies themselves are also prone to rise and fall after certain forks, typically in line with market sentiment. For example, ETH (the Ethereum token) rose in value after the successful implementation of “London”.
By familiarizing yourself with the updates and changes that occur with blockchain forks, you may empower yourself to make better choices with your cryptocurrency.