I’m sure you’ve heard about cryptocurrencies and the stratospheric growth in their price that the whole globe has seen in the past decade. With the growth of cryptocurrencies, we have seen severe new concepts relating to crypto and blockchain technology coming into the market every day.
These new technologies offer an excellent chance for investors to diversify their portfolios and maximize profit with minimal risk. These new technologies also help overcome several issues that the crypto ecosystem faces every day.
The term “hard fork” has lately dominated the crypto news. A hard fork is a newer technology deployed by the blockchain network. Resulting in a perpetual split into two different systems that function in tandem.
In this article, we’ll have an overview of what a hard fork is, its working and its importance. But before that, we’ll learn what forks are for a better understanding of the central theme of this article. Let’s start.
What are Crypto Forks?
The word fork refers to a fork commonly found on roadways. A fork is a juncture where two roadways split from one another. As a result, in cryptocurrency jargon, a fork marks a period when one cryptocurrency breaks into two different currencies. We already know that communities mine and govern cryptocurrencies.
Often, these groups will have considerable differences regarding the core characteristics of money. For example, some programmers may believe that Proof of Stake consensus is a better option process, whilst others might prefer to stick with the proof of stake scheme.
Several times, a serious hack occurred in the cryptocurrency, raising debates over future safety measures. Simply put, the eventual effect is that one community is then divided. They can be split into two or even more.
Occasionally, the community might settle to the norms and begin acting as a unified body. While sometimes, the conflicts become intractable, causing the cryptocurrency to disintegrate. The same currency can even fork several times. That is why we see several copies of the same currency, and these versions are always changing.
These modifications greatly impact the user community and the cryptocurrency’s acceptability. These elements are critical in determining the value of any cryptocurrency. This explains why forks frequently result in huge price changes. But, the end effect is frequently unchanged, and two distinct currencies emerge with distinct public ledgers derived from a single blockchain.
Furthermore, following a cryptocurrency fork, one currency can get more attention than the other. In these situations, the alternative currency seems to have a weaker community acceptance value and falls into obscurity with time. But both currencies mostly coexist. As a result, neither the community acceptance nor the financial worth of either currency is much altered.
Cryptocurrency forks are further classified into two types: accidental forks and intentional forks. An accidental fork, as the same implies, happened accidentally during mining. It is often not easy to determine who mined the block distinctively.
This results in an accidental fork being created, which merely happens accidentally. Nothing worrisome as mostly cryptocurrency itself resolved this issue.
In contrast, an intentional fork is pre-planned and is the consequence of a disagreement. They are further classified into soft forks and hard forks. This guide will focus more on hard forks, as mentioned earlier.
Understanding Hard Forks
A hard fork modifies a cryptocurrency and splits it, creating two different versions. Hard forks, in a nutshell, are substantial modifications to how blockchain algorithms operate. It might be anything as simple as the hashing algorithm that needs to be altered.
Once the new chain comes into existence, the established cryptocurrency will be an entirely different unit. This implies the modifications aren’t compatible with older ones.
If a cryptocurrency wants to hard fork, the prior norms become fully obsolete when the change is made. This implies that once the change is made, the upgraded ones will follow a different and newer path while the older ones will follow the old path.
After some time, the older currency will realize that its version of currency is older and not compatible with the newer one. As a result, the older update of the currency won’t work. And the person holding the older version will technically become users of separate blockchains that will be disconnected.
That’s why anytime a hard fork occurs; the old currency must be transformed into an upgraded one. They might be transformed on a 1:1 basis, wherein the coins are just mirrored. They can also be transformed using an alternative ratio, dividing the old coins to generate new ones.
It is critical to comprehend that a hard fork requires unanimity. If an agreement is established, the old coin will be phased out and replaced with the upgraded one. But, all participants might not accept the concept of a hard fork and choose to disagree. In many circumstances, many stakeholders vote to maintain the previous structure.
When this happens, the coin separates into two new currencies. Groups are created, and each group can proceed according to their notions. As a result, A “contentious hard fork” is created. It is the one in which all stakeholders do not accept the upgrade idea; there is no complete consensus.
How do Hard Forks Work?
To better understand the working of a hard fork, consider a blockchain network. A blockchain network is a distributed ledger system that records all the transactions in blocks and forms a chain.
These records also contain all the information rules of how a network should operate. The users must agree upon a certain idea before making a change.
Similarly, miners must agree on the new regulations and what constitutes a legitimate blockchain in hard forking. So, if you wish to modify the regulations, you must “fork it” to signify the existence of a modification or deviation from the protocol.
After then, the engineers may modify the system to accommodate the new regulations. Various currencies are created in this way, such as Bitcoin Cash. For a newbie, it might be difficult to differentiate between these new versions and put the numerous forks into a timeline. Thorough research is therefore advised.
Significance of Hard Forks
Because of the fast-paced dynamics of blockchain technology, things evolve a lot quicker than we think, especially in the crypto sector. Consequently, cryptocurrency codes are always evolving and upgrading and are vulnerable to abuse and growth as technology evolves.
A hard fork usually occurs due to a variety of justifiable reasons. It can occur to add upgraded functionalities and services of blockchain technologies to improve, compete and be compatible with the latest technologies.
Community Software developers often disagree over which adjustments would be better for cryptocurrency ventures. These disagreements can sometimes lead to irreparable disputes that are only resolved with diverging variants of their cryptocurrency.
In certain circumstances, a network update is insufficient, and a complete rewrite of the old code is necessary. A useful parallel here is that new-generation gaming consoles or smartphones are frequently incompatible with older video games or apps. This calls for hard forking to take place.
Hard forks can also correct vulnerability gaps in systems, provide innovative features or improve performance, and adjust mining incentives or transaction costs and the pace and volume of blockchain transactions. Furthermore, hard forks can assist smaller blockchains in reversing fraudulent transactions in which malicious people scammed or cheated consumers out of their assets.
One of the most prominent examples of hard forking is Bitcoin Cash, a second version of Bitcoin. It was created in 2017 over a long controversy when Bitcoin Cash miners upgraded to a version that boosted the size of one block from 1MB to 8MB. Consequently, two distinct Bitcoin currencies now operate, each with its own set of laws and purposes.
Hard forks can also be used as a means of marketing effort to draw focus towards a new cryptocurrency. In 2017, anybody who possessed Bitcoin was entitled to an equivalent amount of Bitcoin Gold. The purpose of this was to commemorate the hard-forked Bitcoin Gold.
Differences Between Hard and Soft Forks
There are several similarities between a hard fork and a soft fork. One is that both the older and newer version stays on the blockchain network, resulting in a split. In the case of soft forks, a modification is implemented to the software system that does not conflict with the code.
The users might not even notice the change as the old nodes may process data that seems incorrect to upgraded nodes. On the contrary, Hard forks cause nodes to cease old blocks after the adoption of new protocols, but soft forks let updated nodes connect with old nodes.
Simply put, backward compatibility is a feature of a soft fork since both the old and updated version can connect and exist on the same blockchain. Therefore it resembles a software upgrade in which you can continue to access and utilize previous variants of the system’s data.
Hard forks are often intended for major network updates like introducing new features, resolving security flaws, altering standards, or, in certain circumstances, reversing blockchain breaches. Soft forks are typically implemented for minor coding modifications that do not affect the blockchain system.
A soft fork is similar to an infrequent system update of your phone or computer, but a hard fork is similar to upgrading your software from Microsoft to iOS.
Soft forks are often chosen over hard forks because they are less intrusive. A hard fork is possibly trickier in the circumstances involving a fundamental shift or a dispute developing since the system might become less safe and more prone to assaults.
It also increases the possibility of More spending on “Replay Attacks,” in which a malicious user intercepts a transaction across one fork and repeats it on another, rendering both transactions legal.
The Financial Consequences of Hard Forks
A hard fork has a significant financial consequences. It can produce severe instability in the ecosystem for a variety of reasons. Several prominent cryptocurrency speculators have utilized hard forks previously to artificially raise the market and make money quickly.
It is customary for major cryptocurrency dealers to embark on a purchasing binge just ahead of a hard fork. This constant purchase provides them with access to a large number of coins. Consequently, because of the fork, swapping old coins for new ones occurs. The traders are well informed about the new coin’s price exaggeration.
The traders are well informed that the value of the upgraded coin has been greatly exaggerated. Therefore, they continue to sell them, leading to a fall in their value. The traders simply reap the benefits of the fork’s uncertainty to persuade the current buyer that the coins’ worth is far more than they think.
Forking frequently raises the value of a coin. This is due to the new currency’s modern technology. As a result, more individuals invest in the currency, which may contribute to a short-term boost in worth.
The truth is that forking may be rather upsetting to the cryptocurrency industry sometimes. Yet, the consequences of not forking over can be far more severe. Since cryptocurrencies are constructed on technology, they must be kept up-to-date on a regular basis.
There is a risk of them becoming stagnant if not upgraded. This might imply that they possess limited functionality and are more vulnerable to assaults.
Examples of Hard Forks
There are countless past examples of hard forks. Below we have mentioned some of the prominent examples of the hard fork and how they shaped the business.
Bitcoin Cash and Segregated Witness2x (SegWit)
SegWit2x was a planned update aimed at assisting Bitcoin’s scaling. It was planned to install Segregated Witness and raise the maximum size of a block on the crypto platform from 1MB to 2 MB.
The contentious New York Agreement concluded on 23 May 2017 and settled on the adoption of SegWit2x. The deal stipulated that a group of Bitcoin entrepreneurs and miners comprising more than 85% of the platform’s hash rate would determine the fate of BTC.
SegWit would be introduced with a soft fork, with the block size restriction applied subsequently via a hard fork. This idea was contentious since it excluded any programmer from the primary Bitcoin source, Bitcoin Core.
Therefore, it was viewed as a centralized force. That means a collection of firms choosing the direction of the system without any miners and nodes achieving agreement. The accord occurred after several years of discussion about Bitcoin scalability.
Small block supporters stated that bigger blocks would render hosting a complete node more difficult, ultimately centralizing the coin. Some in favour of new blocks stated that growing transaction costs would hinder BTC’s progress and drive some members away from the platform. Soft forks initiated by users are conceivable on the Bitcoin network.
Under this situation, wallet providers, exchanges, and many other organizations hosting full nodes can migrate to the latest upgrade of the blockchain, promising a future activation point and compelling miners on a system to implement the new regulations. If they disagree, the network may be separated.
There was a time when Bitcoin users lobbied for a soft fork for a user who activated one in retaliation to the private meeting determining Bitcoin’s destiny and preventing a trend from being formed.
They advocated for the implementation of Bitcoin Improvement Proposal 148, which intended to put SegWit on the Bitcoin system, and said that this implementation would put the Bitcoin system at risk of a replay attack.
In March 2017, it was issued and was scheduled to go into effect on 1 August of the same year. Concerned about the implementation of the Segwitx2 plan and considering the community-supported SegWit, a few big-block proponents chose to split the Bitcoin network on 1 August 2017.
Consequently, Bitcoin Cash was born (BCH). Its proponents saw the divide as a continuity of the initial goal of Satoshi Nakamoto’s rather than the formation of a competing network.
The Bitcoin Cash network was designed with an 8-megabyte block limit, which has now been raised to 32 megabytes. Bitcoin Cash advocates continue to believe that its cheap transaction fees would enable it to expand and finance the cashless economy, while Bitcoin would be left behind due to its higher transaction cost.
The hard fork, namely the bitcoin Cash, brought the potential of hard forking into the spotlight, and many additional Bitcoin forks followed suit. One of them I Bitcoin Gold (BTG)
Conclusion
A hard fork signifies modification to the code of a blockchain system that makes originally rejected blocks and transactions legal. On the contrary, a soft fork is a system update that also connects the previous version on the blockchain. That means it is backwards compatible. From the development perspective, hard and soft forks both are crucial.
Regardless of the limitations of centralized administration, they enable the community to implement adequate adjustments and enhancements. Still, keep in mind that the crypto industry is still in its early stages. The fluctuations in the price of crypto assets might have a big influence on their worth.