A cryptocurrency fork is an update or change to the software governing the distributed network that verifies transactions in a particular cryptocurrency. This is linked to the blockchain technology that forms the backbone of most cryptocurrencies. A fork is an event in the blockchain that modifies the blockchain, which is the decentralized public ledger of transactions that is maintained by crypto miners. A fork is basically a divergence in the chain of blocks. There could be many reasons behind forking: it could be bug fixes, improving the security of older software or adapting the network in terms of scalability.
Forks can happen for instance when there is a security update to the software; when a new rule is established on the blockchain; or even accidentally, when two or more mines find a block almost at the same time (which is rare). Whichever chain becomes longer as subsequent blocks are added will emerge dominant, and the network will abandon the blocks that are not in this longer chain. In the case of new rules being adopted, network participants need to agree to follow one chain.
There are two types of crypto forks: hard forks and soft forks. Let's dive into the differences!
What is a hard fork?
A hard fork is a radical change in the network’s protocol, effectively creating two branches on the blockchain, one that follows the previous protocol and one that follows the new version. Miners have to decide if they follow the old path of the blockchain or the new version. Network participants need to upgrade their protocol software to follow the new path and they will stop processing blocks that follow the old rules. Users running the old software will see any new transactions as invalid. The original blockchain is duplicated, and if not enough users follow the new path there could be a split in the blockchain. A hard fork can create a permanent divergence from the previous version of the blockchain.
Why is this important?
Permanent chain splits can lead to two or more competing cryptocurrencies existing on the blockchain.
One example is the 2017 birth of Bitcoin Cash, which is a spin-off of the original Bitcoin. The network split was mainly due to a disagreement on how to increase the rate of transactions per second to accommodate increased demand.
Another example of a hard fork is when in 2016 a third-party application on the Ethereum blockchain was hacked, and millions of dollars worth of ether was stolen. To erase the hack from Ethereum’s ledger and return the money to its original owners, Ethereum implemented a hard fork. The newly created ledger eliminated the hack and returned the stolen ether, and has been followed by the majority of users.
What is a soft fork?
A soft fork change in the blockchain does not require a mandatory update of the protocol from network users. Users who accept the new protocol update and those who do not are still compatible with each other after a soft fork. These changes do not result in a new path for the blockchain or new cryptocurrencies. That is why a soft fork is also backward compatible, meaning it does not result in old blocks not being processed under the upgrade.
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