Guide to Cryptocurrency Forks: Hard Fork vs Soft Fork – What Are They?
When you are talking about forks, they are actually a very common thing when it comes to the software used in computing, and they represent something that many people have no idea about. In fact, forks are one of the least understood terms when speaking about software. If you would like to understand exactly what a fork really is, you need to take a look at Bitcoin and the technology that is behind it. This is because Bitcoin is the reason why forks are a real thing, and Bitcoin’s creation has spearheaded the entire crypto system.
Basics You Need to Know About Bitcoin
In case you didn’t know, Bitcoin is a payment currency and network that works on what is considered to be peer-to-peer system that is decentralized. Why Bitcoin is so popular, is because it is its own software protocol that is based off some computing codes and predefined rules on a network that is essentially hack-proof. The one big thing to keep in mind, however, is that Bitcoin is actually an open sourced software. This means that anybody is able to view the computing codes, as well as use and inspect them.
What is a Cryptocurrency Fork?
When it comes to the blockchain, all of the technology that Bitcoin is based off of, it is actually considered a distributed ledger that is designed with different ‘blocks’ of date that are continually growing and forming a singular block of chains. This is actually the exact reason why it is called the blockchain network. Since Bitcoin was designed on a decentralized network, those within the network have to agree with a common core of rules so that transactions are able to be validated. This is exactly how they are able to achieve the same consensus. It is this agreement that results in the verified chain of information, which everyone can agree with and consider to be correct.
A fork happens when there is a split in a single blockchain, and it becomes two. So why does a fork happen you ask?
Since Bitcoin is considered a decentralized and distributed network, one of these forks happen when more than one miner discovers a block simultaneously, or at the exact same time. This results in two separate chains. But this fork is only temporary as it is the chain that can find the next new block the soonest that becomes the longer chin and will then automatically become what is considered to be the truth. This means that the network will, then abandon the smaller, shorter chain.
The Rules of the Underlying Protocol Change
When this happens, it represents a change in the codes that are both permanent, as well as done by the developers. There are a couple of reasons why the codebase is able to be changed.
- One of the core rules has been changed (for example, an increase in the size of the block)
- New features that enhance the network’s functions were added
When there is a fork due to a Split Consensus, it is only temporary. When this is the case, the focus is typically considered to be that a core rule has been changed. These forks are always permanent and will require all of the people within the network to perform an upgrade all of their software as it relates to Bitcoin. This will allow them to integrate all of the updated changes with the software that they are using.
Whenever a core rule has been changed, there is always a change with the rules of all the underlying protocol as well. This change is typically classified into three separate categories.
What is a Soft Fork
With a soft fork, you have a type of software upgrade, which is going to be backward compatible with other older versions of that same software. So even when there has been a software upgrade, if you didn’t upgrade with the newer software, you are still able to take part in verifying and validating transactions.
When it comes to forks, it is the soft fork that is easier to have implemented, as there are a majority of those who will be required to upgrade to the newer software. No matter if you upgraded to the new software or not, you will still continue to be able to recognize the new blocks, as well as maintain your compatibility with the now updated network. While you can still participate in verifying and validating transactions, since you have not upgraded to the newer version of the software, the functionality is going to be affected.
For examples of a soft fork, let’s say that there will be a new rule stating that the size of the block is going to be altered from the 1MB, or 1,000KB current size, to an 800KB size. If you don’t upgrade your software, you will still be able to see all of the incoming transactions and that they are valid.
However, when you try to go and mine some new blocks with your outdated software, your blocks, as well as all of your efforts, are going to be rejected and not work with the network. So with a soft fork, you have a gradually upgrading mechanism. This helps to make those who haven’t upgraded yet, incentivized to get upgraded to the new software or risk missing out on some of the upgraded functions of the new software.
Some Examples of Different Soft Forks Include:
BIP 66 – This was one soft fork that was on the signature validation process done by Bitcoin.
P2SH – This soft fork allowed for multi-signature addresses to be within Bitcoin’s network.
What is a Hard Fork
When you hear the term hard fork, it is referring to a new upgraded software that is not compatible with any of the older versions of the same software. This means that all of the participants are going to have to upgrade to the newer version of the software if they wish to continue to keep participating, as well as validating the new transactions.
For those who don’t upgrade their software to the new one, are going to be removed from the entire network and will be unable to continue to process and validate any new transactions. It is this separation that results in what’s considered to be a permanent divergence from the blockchain technology. While support is there within the minority chain through participants mining the chain, both of the chains are able to exist concurrently.
With a hard fork, it can be either a planned hard fork, or a controversial one.
A Planned Hard Fork
With planned hard forks, you have a protocol upgrade, which was planned and has been on the technology’s agenda since the very start. Since a hard fork is considered to be a upgrade that has been designed to enhance the features and capabilities of the blockchain, the whole community, lead by the developers, will transit over to the newer chain as the upgraded one is going to require changes within the underlying code. This updated chain means that the older chain is no longer needed and will essentially become obsolete. It simply doesn’t make any sense for anybody to continue to support the old chain any longer, as there is no incentive to do so. Because of this, there will not any type of new coin creation.
- Some Past Examples of a Planned Hard Fork
Ethereum’s Byzantium – Since Ethereum had a 2-phase upgrade plan, this was actually the first part of that plan. Occurring in October of 2017, Byzantium represents the upgrading of the entire Ethereum blockchain and created increased scalability, as well as the integration of more private-like transactions.
Monero – Happening in January of 2017, Monero had hard-forked so that it was able to be upgraded to the entire network, mainly by implementing Ring Confidential Transactions, also known as RCT. This upgrade was huge, as it helped to improve both Monero’s security, as well as its privacy.
A Contentious Hard Fork
With contentious hard forks, there is typically some type of disagreements that have been going on within the entire community. These disagreements will then cause for the creation of a brand new chain, which is better than the old one in the eyes of those who are for it. This new code will usually include some major change to the codes, similar to the creation of the alt coin, Bitcoin Cash. On a side note, Bitcoin is actually in the midst of 2 other hard forks as of right now.
Some Examples of a Contentious Hard Fork
Bitcoin Cash – The coin, Bitcoin cash was hard forked and came about by some of the Bitcoin community wanting to see Bitcoin scale even better through enlarging its block size from the current and standard 1MB, all the way up to 8MB.
The entire reason behind this was so that more transactions would be able to get processed, hence reducing the fees that the users’ would have to pay, as well as minimize any bottlenecking of the Bitcoin network as more and more people started to use it. This particular hard fork happened and resulted in the creation of one brand new cryptocurrency that is called the Bitcoin Cash.
Ethereum Classic – Ethereum’s hard fork was due in part to reverse the unwanted effects that a hack had on one of the applications called DAO, also known as the Decentralized Autonomous Organization. Although the hard fork did happen, there was some of that community that was opposed to any changing of the Ethereum blockchain at all, as to preserve the nature of its immutability.
While the developers of Ethereum, as well as the main majority of the Ethereum community, did move forward with the completion of the hard fork, those that decided to stay behind and not upgrade the software being used, were able to continue to mine the coins, which has become known as the coin, Ethereum Classic, or ETC.
On a side note, since most of the Ethereum community transitioned over to the brand new chain, they were able to maintain the original Ethereum symbol, ETH. The minority that supported the older chain, however, were given the new term and coin name Ethereum Classic, also known as ETC.
Types of Spin-Off Coins
Because Bitcoin has an open source protocol, anybody is able to view its code base, as well as make different changes in order to create a brand new coin that has upgraded features. For example, a fork of the cryptocurrency Bitcoin resulting from the changing codebase of the Bitcoin, created Litecoin. In fact, some of the features of the spin-off coin Litecoin include:
- Averages of 2 1/2 minutes of block time that compared to Bitcoin’s slower ten (10) minutes, is much faster
- A different algorithm consensus, it utilizes Scrypt, as opposed to the Bitcoin SHA 256
- Has a fixed supply of 84 million, as compared to Bitcoin’s fixed supply of just 21 million
Coins That Have Been Created as Variants of Bitcoin
Does That Mean Free Coin?
That is 100% correct. Whenever there is a hard fork, they are more than welcomed by the entire community, as they will essentially issue ‘free’ coins to the community. It is this duplication of the entire chain from the hard forks that entitles the holders of all the old chain, to continue receiving some of the newly created coins. With these ‘forked’ coins, you have several different methods for obtaining the new coins. Some of them include:=
- Via airdrops
- Distributing private keys for the brand new network
- Pointing your node to the newly forked network
When it comes to cryptocurrency, a hard fork is an aspect that is always going to happen so that the coin is able to evolve. While many of them actually are legitimate coins, others have turned out to be complete scams. However, no matter what your stance on cryptocurrency may be, you have to respect everybody’s right to develop and attempt to grow such projects. At the end of the day, if you are able to understand the principles of what a hard fork really is, you will also understand that it’s the responsibility of the community to self-audit.
While cryptocurrency, in general, is still relatively new and is going to continue to grow, along with that, will come an advancement of technology and more secure ways to verify and approve transactions.
The best thing you can do is to embrace the changing ways when it comes to cryptocurrency and your finances and be sure to research everything before you invest your hard earned money into it.