You may have heard the term fork, and wondered what on Earth a piece of cutlery has to do with cryptocurrency and blockchain. Well, the use of the word relates more to a fork in the road, where one road splits into two. A fork in crypto is a change to the underlying code that makes up a blockchain. This piece will delve into the differences between hard and soft forks and look at the impact that forks can have on cryptocurrencies.
What is a fork?
A blockchain fork makes changes to the software protocol of a blockchain. There are two main types of fork: a soft fork and a hard fork. Soft forks make minor changes to the code or upgrades to the network without disrupting the operation of a blockchain. A hard fork, on the other hand, makes much more significant changes to a blockchain, such as block production time, coin distribution rate, or even the way transactions work. For this reason, hard forks often result in a new blockchain and cryptocurrency being created as miners become split over which version of the blockchain to support.
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
Why do hard and soft forks occur?
Cryptocurrencies, unlike banks or other financial software, do not have a central authority to decide when to roll out updates or new features. To get around this, developers and miners must reach a consensus (i.e general agreement) on the direction of the blockchain. Forks operate as this consensus mechanism.
There are a variety of reasons forks can occur. For soft forks, the goal is usually to implement some new feature or fix a bug. Hard forks are much more significant and may be used to improve a network’s scalability, integrity, or efficiency for example. It’s important to note that hard forks can still occur even if 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 primarily be a store of value. Whereas proponents in favour of Bitcoin Cash believed Bitcoin’s 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.
Ethereum Classic hard fork
Originally, Ethereum was one unified blockchain. But in June 2016, the Ethereum network was hacked and $50 million dollars worth of funds were stolen. As a result, a hard fork was performed in an attempt to secure the network and return stolen funds to their original owners (as according to the records prior to the hack). This hard fork led to two versions of the blockchain existing simultaneously. Technically speaking, Ethereum Classic (ETC) is the original blockchain, whereas Ethereum (ETH) continued on, having made security improvements and other changes to its protocol.
What are the key features of a hard fork?
A blockchain hard fork is a permanent divergence in the blockchain. Computers (nodes) running the previous version of the blockchain 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 backwards-compatible. New blocks are still compatible with old ones.
It’s important to note that 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.
You can think of a soft fork like upgrading your gaming console (e.g. Playstation or Xbox). Old games continue to be compatible with the new console (and software), but you can’t play new games on the old consoles.
Soft forks are the most common type of fork as they do not dramatically alter the network, but rather make it more usable or efficient in some way.
How do forks impact cryptocurrencies?
Typically, a hard fork results in a blockchain being split into two and another cryptocurrency being created. This means that you will have two coins, one from the original blockchain and an upgraded version of this coin after a hard fork occurs. For example, Bitcoin Cash (BCH), which was created following the Bitcoin 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 is also prone to rise and fall after certain forks, typically in line with market sentiment. For example, Ether (ETH) rose in value after the successful implementation of the London hard fork. Hard forks can also artificially drive up the price of cryptocurrencies as people buy the original coin (ETH for example) in order to receive a free airdrop of the new coin that will be created (i.e. ETC). Often, buyers will sell straight after this has occurred, causing a crash in price.
Cryptocurrency forks play an important role in updating and maintaining blockchains. Soft forks happen all the time, but hard forks are the ones that get press coverage because they are often the result of disagreement between developers. This piece has explored the differences between hard and soft forks and looked at the impact that forks can have on cryptocurrencies. If you would like to learn more about the Bitcoin Cash or Ethereum Classic forks or anything else crypto related, continue exploring Swyftx Learn!