What is a hardfork

Hardfork is the term for a radical change to a network protocol. So radical that it is incompatible with an earlier version of the protocol and leads to a situation where, in a sense, the blockchain begins anew. It also often leads to the separation of the new cryptocurrency, as was the case with bitcoin and bitcoin-cash, for example. Such a change can happen with the general consent of the community when everyone in the network decides to switch to a newer version of the protocol. However, more often than not, it leads to disagreement and ends with the launch of a second blockchain – based on the new rules – operating in parallel with the first.

Terms you need to know

Before I start talking about words like soft, hard and other oddly used words, I would like to give a brief explanation of each term. Just to make sure that we are speaking the same language.

So,

Fork: the moment when you have a different version of the protocol than the main one.

Now let’s talk about each of them in more detail.

How are “hard” and “soft” forks created?

In general, any software update to a currency (at least those under democratic control, like Bitcoin) requires some form of consensus. This is true for both soft fork and hard fork implementations.

Creating a fork that updates the existing software that everyone currently uses requires majority (consensus) support from coin holders (more technically “nodes”) connected to the coin network. These nodes must agree to the update and update the software accordingly. In practice, this consensus may come mainly from miners and groups of miners, rather than the total number of users, as they tend to control a certain number of nodes. As for simply creating a hard-fork or soft-fork (not accepting it), anyone can take the coin code from GitHub and modify it, thus creating a hard-fork or soft-fork for acceptance. This means that any developer with the necessary skills could decide to hard-fork bitcoin or create a unique copy of the bitcoin coin. That would be the “easy” part. The hard part is getting the support of miners, users (who not only need to download and install a cryptocurrency wallet, but also use and exchange the currency) and exchange sites.

Such a fork could happen for any reason, whether it is to innovate (as in the case of Bitcoin Cash), to repair the damage caused by a hack (as in the case of Ethereum), or simply because a consensus could not be reached for a soft fork (as in the case of Bitcoin Cash). We hope you understand our explanation and advice. Follow Hard Forks and Soft Forks news on our website and have a good investment!

Before we continue talking about forks or any other kind of forks: why do we need to update the protocol?

Two men drawing the word “Renewal” on a banner

To address important security risks found in earlier versions. Because cryptocurrency is a relatively new invention, it has recently entered a period of life that conventional currency went through many years ago. It took many versions of paper, color, font, security layers, and more to create the dollar we know today. It is now much harder to counterfeit. Similarly, it will take some time to find all the security risks of cryptocurrency and eliminate them.

Adding new features – The fact that you have Windows 10 today basically means that the first Windows needed tweaking. Lots of improvements. The blockchain code is also updated year after year. Since it’s an open-source development, developers work around the world and offer their improvements to the community. If the feature proves good enough, it will be added to the next version.

To undo the transactions. Remember the fake dollars? The government can put a crook in jail, but it’s unlikely to be able to return the money to all the people who mistook it for real money. Shame. In the world of cryptocurrency, you can minimize the damage. Once a community discovers that it has a security breach, it can declare all transactions made since a specified date as nonexistent. It’s as if it never happened. Have you ever wanted to go back in time? Here you can, have fun. For the good guys, this reverse process means that we just need to make transactions again. For the “bad guys”, it will be harder to steal. However, it is not impossible.

Who is involved in a hardfork?

Usually a hardfork is the result of a long discussion and consensus that is reached in the blockchain project community. First, the developers come up with a proposal. It is discussed, refined and tested, and finally released.

If the update is large and involves not only technical changes, but also other changes – for example, in the tokenomics of the crypto-project – the discussion can go beyond the developer community. Bitcoin, for example, has an entire system for suggesting protocol improvements called the Bitcoin Improvement Proposal (BIP). Ethereum developers follow a similar approach.

To activate a hardforward, it is not enough just to write new code, you also need to get the approval of most of the other participants. In addition to developers, the other key party is the validators who manage the network’s nodes. It is on them that the stable and healthy operation of the blockchain, and therefore the entire project, depends. 

Validators are well aware of what blockchain users need and, if necessary, can give their opinion on proposed changes. If validators do not support the update, they simply will not migrate their nodes to it.

It is important to understand that a real blockchain protocol cannot be unilaterally updated without community consent, because it is not only the network that is decentralized, but also its software layer.

This is well demonstrated by the example of Terra. After the dramatic collapse of the UST Stablecoin and the native cryptocurrency LUNA, the founder of the project, Do Kwon proposed to issue a new digital currency through a hardfork. According to Kwon, it could be used to compensate holders of devalued cryptocurrencies. However, many in the Terra community disagreed with him.

What is a soft fork?

As I said before, this is a protocol change, but with backwards compatibility.

As an example, I will use the rules of the road (in fact, they are very similar). Let’s say your country passed a law that the minimum speed on the highway should be 50 kilometers and the maximum 70 kilometers. One day, the government decides that from now on, the minimum will be 60 and the maximum will be 90. What will happen? For most drivers who drive at an average speed of 60 kilometres, nothing will change. For them, it’s still OK to drive and they’re not breaking the new minimum. But if you were driving at 30 kilometres – you would have to speed up.

Similarly, you don’t need to upgrade your Blockchain version to the soft fork version right away, and you can work exactly the same way as before, unless you want to do something against the new protocol.

What is a hard fork

If we continue with the traffic example, a hard fork is essentially creating a new parallel universe. With its own highways, drivers, and blackjack.

If there was a driver who lived in city A and had a Jeep – now there would be an additional “Cash Driver” who lives in “Cash City A” and has a “Cash Jeep”. Thus, both drivers live separate lives in separate universes. But the Cash City A driver can never visit his doppelganger or get a job in Cash City A – there is no portal between the realities. It looks like a plot from “Black Mirror”.

Back to cryptocurrency terms. After a fork, the previous version and the new version are completely separate, there is no possibility of communication or transactions between them. As a rule, new version inherits all transaction history, and from that point on each version will have its own history.

Why do we need a hardfork?

Every blockchain operates on the basis of some kind of protocol – an application consisting of various components. The protocol code for most popular blockchain projects is open. This means that it is published in its entirety and can be freely copied.

Blockchain protocols are constantly being improved by removing bugs and vulnerabilities and adding enhancements. Some of these changes can be quite extensive. Then the developers make a hardfork: they do not change the current version of the protocol, but create a parallel copy of it, where they add new code. And then the validators or bitcoin-node operators switch to the new version of the protocol. Of course, if they agree with the proposed changes.

This approach keeps the blockchain stable, since the current protocol remains unchanged and is not at risk of failures when upgrading.

Hardforces are conducted for major updates, but they can also serve as a crisis management tool. For example, after The DAO was hacked in 2016, Ethereum developers used a hardfork to “return” about $55 million in stolen funds to their owners, which was a very significant amount for the crypto industry at the time.

DAO

The DAO and the treasure

Ethereum blockchain difference: DAO was built as a smart contract on the Ethereum blockchain and was supposed to function as a venture capital fund. Once created, all Ether holders could exchange it for DAO tokens.

What happened: DAO was hacked, resulting in the deduction of 3.6 million Ethers. In order to prevent the hacker from embezzling the money, the community voted for a soft fork. But after a while, the majority voted for a hard fork as well.

Not every fork becomes a hardfork

If not all participants accept the change and want to keep the old “way”, then the blockchain is branched forever. An example would be BTC unbundling and BCH isolation, followed by BCH unbundling and BSV isolation.

Blockchain network unbundling can indeed occur in the vast majority of cryptocurrency projects, not just bitcoin, such as the se ty Ethereum and others. This is because blockchains and digital assets operate on the same basis.

How Ethereum hardforces happened

But the bitcoin protocol is not the only one to undergo hardforces. In the past, such updates have also affected Ethereum, the second most capitalized cryptocurrency. The most famous hardfork was the Ethereum Classic cryptocurrency. But it wasn’t the only one. On September 15, 2022, Ethereum cryptocurrency moved to a new consensus algorithm, Proof-of-Stake, instead of the previous Proof-of-Work (mining) as a result of The Merge. Not all users approved this upgrade, so the EthereumPoW hardfork emerged with a corresponding coin. The main purpose of the new fork is to continue to support mining on the network. Actually, the initiators of the fork were large miners who did not want to lose their income at the expense of expensive equipment.

Validator’s remuneration is generated by staking. The validator needs to place 32 ether (ETH) on a special smart contract and quietly take commissions for transactions. In turn, an expert from Fintolk specifies that some of the miners do not want to stop making money exactly by mining, because they have already spent and bought video cards and started expensive farms.

How does a hardfork affect cryptocurrency prices?

This kind of event almost always affects cryptocurrency prices. If a hardfork is meant to solve some large-scale problems of a blockchain project, there is a consensus about its necessity and the community expects it, then the price of that network’s crypto-asset is likely to rise.

But if the hardforward causes a split in the community, does not meet the project’s development objectives, or does not go as planned, then it is likely that the native cryptocurrency will lose value as a result. More often than not, this is due to investors’ doubts about the blockchain’s future prospects.

One way or another, the hardforward creates uncertainty risk for the cryptocurrency.

Who invented the hardfork?

Hardforces are widely used in programming. Most source code libraries are communicated with using Git, the world’s most popular version control system for applications. It allows you to create copies of the current library (a kind of offshoot of the original version of the library). Thanks to this feature, developers, in particular, can test changes that need to be made to the main library without the risk of “breaking” it. At the same time, the copy retains its connection to the “parent” branch.

Thus, during the course of various development tasks, new “branches” often grow from the original library, which, in turn, can also be copied. Thus, the history of changes in the application code has a tree-like structure and resembles the fork tines with a single base (hence the name of the phenomenon).  This is roughly what happens with the blockchain protocol.

Soft fork and hard fork: what is the difference between them

Forking can happen in two different ways. Each will produce different results, so it is important to know when they will occur. Understand their differences!

Summary

A hard fork in cryptocurrency is a change in a cryptocurrency’s protocol that creates a new version of the blockchain that is not compatible with the old one. This can lead to two different versions of the cryptocurrency, one that follows the old protocol and one that follows the new one. Hard forks are implemented to make changes to the underlying technology of the cryptocurrency, such as introducing new features or addressing security vulnerabilities. Hard forks can also be used to reverse transactions, such as in the case of a hack. They can also be contentious, as they can lead to disputes within the community and can have an impact on the value of the cryptocurrency. Some hard forks result in the creation of a new cryptocurrency, such as Bitcoin Cash, which was created in 2017 as a result of a hard fork in the Bitcoin blockchain.

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