Crypto Forks Explained

April 07, 2024

Soft fork vs hard fork

In the blockchain space, a ‘fork’ is a representation of a change to the blockchain. As blockchains need to be updated to accommodate new technology, they often need to add in changes to the protocol – in simple terms, alter how the blockchain works. 

A protocol is a set of predefined rules within the network that determines how users interact with each other. Essentially, it’s like the rulebook for a cryptocurrency.

When updating this protocol, there are two types of fork that can occur: a soft fork and a hard fork. In this article, we will explain what a soft fork is, what a hard fork is, the difference between the two, and notable hard forks in the cryptocurrency space.

How does blockchain work

In order to understand forks and how they work, we must first understand how a blockchain network functions.

Cryptocurrencies, such as Bitcoin, work via a blockchain, which is a database or ledger maintained by all the users together instead of one central authority. Bitcoin farming is essentially the process of maintaining the ledger and receiving Bitcoin as a reward.

Computers participating in the network are referred to as nodes. Any transaction or deal made using a cryptocurrency, Bitcoin, for example, is recorded and grouped together into what is known as a ‘block’.

These blocks are then verified by the network, and once verified, they are added to the chain, hence ‘blockchain’. The analogy of a train track works well here, as once a block has been added to the chain, it cannot be reversed, as the entire network has been updated and essentially ‘agreed’ upon the current ledger. This means the blockchain, in a sense, is travelling forward, which explains changes to the network being described as forks.

What is a soft fork?

A soft fork is a change to the blockchain protocol which doesn’t affect the previous blocks in the chain. Users can still operate with the old system, but any new users will be added to the new system.

A soft fork means that for a while both old and new versions of the software are running at the same time. Eventually, the ‘original’ chain will be phased out, as all nodes are eventually upgraded to the new protocol.

Soft forks usually occur when a new rule is added to the blockchain, or tightens existing rules. For the soft fork to happen, a majority of the network must adopt the new blockchain protocol, but not everyone.

What is a hard fork?

A hard fork is a change to the blockchain protocol which requires all users to change. Nodes must upgrade to the latest version to continue participation. A hard fork is often simply referred to as a fork, as it is much more significant.

A hard fork creates an entirely new blockchain, starting a new chain with a new set of requirements. This is often done to implement significant changes or repair security breaches. However, with a hard fork, the original blockchain continues to run, so this can often create two entirely distinct blockchains, some of which thrive in their own way.

Hard forks have historically produced new variants of cryptocurrencies, and in some cases, entirely new cryptocurrencies in themselves. For example, Sushi and PancakeSwap are both hard forks of Uniswap. 

Notable hard forks

Hard forks have often produced entirely new spaces in the cryptocurrency economy, and in many cases, these hard forks become entirely separate communities with their own unique ecosystems.

Here are some of the most notable hard forks in the cryptocurrency space.

Ethereum & Ethereum Classic (2016)

The DAO was a decentralised autonomous organisation (DAO) project which was designed to organise business enterprises with a decentralised model. The project was based on Ethereum. Unfortunately, a vulnerability in the code meant that attackers attempted to steal a third of The DAO’s funds, which was approximately $70 million.

However, as the attack type meant time passing before the funds could be withdrawn, the Ethereum community, alongside founder Vitalik Buterin, decided to execute a hard fork to the blockchain to essentially block the transaction. 

This meant that all Ethereum transactions were now on a new blockchain, preventing the digital heist. The original Ethereum continued as Ethereum Classic.

Bitcoin & Bitcoin Cash (2017)

Bitcoin Cash was a hard fork of Bitcoin created in 2017 from a disagreement in the Bitcoin community about the block size. Some users wanted to keep the block size smaller, which would mean nodes could be operated with fewer resources, but others wanted a cheaper and faster solution, and therefore to increase the block size.

Many in the community disagreed with this change as larger blocks also require more computational power to verify, and would therefore lead to more centralisation of the cryptocurrency, as fewer people would have the computational capacity to run full nodes. There would also be an increased security risk.

As a solution, the community agreed on a hard fork to create Bitcoin Cash, a version of Bitcoin with a larger block size.

Bitcoin Cash & Bitcoin SV (2018)

Bitcoin SV (Satoshi Vision) was created as a hard fork from Bitcoin Cash – a fork of a fork.

This was created for a similar reason to Bitcoin Cash. A disagreement within the Bitcoin Cash community about further increasing the block size (which was at 32MB) led to the creation of Bitcoin SV, which would have a block size of 128MB.

What is an accidental fork?

In some cases, a hard fork can be unintentional. As miners are operating all over the world and in great quantities, in some cases they can verify a block at almost exactly the same time. 

This creates a situation where one group of the network identifies one block as verified, and continues adding to this chain, whereas another group does the same for another.

Accidental forks occur relatively frequently and can be quickly fixed. One chain eventually becomes longer than another, and then is eventually determined as the ‘correct’ chain by the network. Once this happens, the nodes will start adding blocks solely to the original chain. Blocks of the old network are referred to as ‘orphaned blocks’ and will be phased out in a similar way to a soft fork.

Conclusion

Soft forks and hard forks are frequent, and a key part of cryptocurrency history. The model of blockchain produces frequent forks, that in some cases are simple tweaks to the protocol, and in other cases are huge shifts that create entirely new cryptocurrencies and communities.

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Author

Caleb is a financial copywriter with a specialisation in fintech and forex. Former copywriter at Barclays and Paysafe. Contributing writer for LiquidityFinder. You can message Caleb here.