To best explain blockchain fork, it’s important to remember that cryptocurrencies run on open-source software. This means that anyone can access their code. Each time someone changes the blockchain protocol, the chain splits. This split is called a fork. Forks can be accidental and intentional, i.e., soft and hard.
This guide will explain how forks work, the difference between a soft and hard fork, and their main benefits and challenges.
What Is a Fork in Crypto?
A crypto fork is a term that describes changes in the blockchain that cause it to split into two different chains. Although it will share similarities with the original blockchain, the new chain will be modified. This means that its users will have to upgrade their software.
Blockchain forks are significant for the crypto community as they can lead to the creation of a new blockchain and coin. They can also have a big impact on cryptocurrency prices. Moreover, they can help developers and users stay connected with data on the main blockchain.
How Do Forks Work?
Crypto forks occur when certain modifications occur on the main blockchain — i.e., when the main chain is divided into two parts. For example, a fork can happen when miners cannot agree on specific protocol changes or when developers decide to add new features to the existing chain.
The new chain will be similar to its parent blockchain. However, it will have different features and goals.
That said, forks can be created accidentally or intentionally. Accidental forks occur when several nodes confirm the same transaction block. This results in the expansion of the main chain.
Intentional forks are created with a specific intention. For example, they can occur to add functionality to an existing blockchain and address security risks. However, they can also resolve user disagreements about how a certain blockchain should function. Intentional forks are further divided into soft and hard forks.
Soft Fork vs Hard Fork
Intentional forks can be soft and hard. Soft forks are software upgrades that are usually initiated by community members. The soft fork will not cause the chain to split if most nodes agree with the new rules. Instead, it will add new features to the main chain.
The best example of a soft fork is the Segregated Witness (SegWit). This Bitcoin upgrade was created to fix bugs and increase block capacity.
Hard forks occur when the community makes changes to the blockchain code. If these changes are incompatible with previous blocks, the chain will be split into two parts. One part will be the original chain, while the other will be its modified version.
Since a new chain is created, hard forks are also responsible for creating new coins. An example of a hard fork is Bitcoin Cash. Namely, not all developers thought that SegWit was a good solution — the majority considered that the BTC block capacity was still too small. This is why they proposed a new solution.
However, this solution was not compatible with Bitcoin’s blockchain, which is why Bitcoin Cash was created.
Another example of a hard fork is the Ethereum Shapella, which was part of the Shanghai Upgrade. Its goal is to allow validators to unstake Ethereum from the Beacon Chain.
The main differences between soft and hard forks can be seen in the following segments:
Since it acts as software, the soft fork will be compatible with the existing blockchain. Older nodes will be able to run on the main blockchain, although they will be limited. This is not the case with a hard fork since it is not compatible with the original blockchain. For the nodes to continue to operate on the chain, they will have to be upgraded.
When it comes to soft forks, most users will have to agree with the proposed changes for them to become the norm. With hard forks, all users must accept the new rules. Otherwise, the blockchain will be incompatible.
A soft fork will not split the blockchain into two parts, while hard forks will — a soft fork will contribute to the creation of one dominant blockchain, while a hard fork will split the blockchain into two different chains.
Pros and Cons of Blockchain Forks
Crypto forks come with the following benefits:
Empowering the Crypto Community
Crypto forks empower the crypto community by allowing users to express their opinions on how blockchain technology should develop. Users will get to accept or reject the proposed changes.
Driving Blockchain Improvements
The successful implementation of forks will help the blockchain to develop. This will also increase the value of its native cryptocurrency. In addition to that, forks will allow developers to try out new ideas and propose solutions that will be useful to the entire community.
Increasing Trading Volume
Crypto forks can increase trading volume as investors prefer to trade their coins just before and after the fork occurs. Forks can also affect the prices of cryptocurrencies. For example, when Bitcoin forked with Bitcoin Cash, the price of BTC plummeted while the price of Bitcoin Cash skyrocketed. Furthermore, hard forks can improve transaction and network speed.
Hard forks will split the blockchain into two parts, which means that new coins will be created. These coins are usually distributed for free through airdrops. Coin holders can benefit by either staking their new tokens or selling them.
With that in mind, crypto forks also come with specific challenges, such as:
Hard forks often confuse investors. When a new coin is created, no one knows how it will perform on the market. This may result in increased volatility of both the original and the new coin.
Since they will split the resources of the main blockchain in two, hard forks can put a strain on the network. This means that nodes and miners will require more storage space.
A loaded network will weaken the chain’s security since the hash power will be diluted. This will make the blockchain more vulnerable to hacks.
Blockchain forks are an essential part of the crypto ecosystem. Their main goal is to support blockchain development. On that note, forks can make small and major chain changes. For example, they can fix bugs and create new blockchains and coins.
Crypto forks can be accidental and intentional. Intentional forks are divided into soft and hard forks. The former acts as software updates, while the latter splits the blockchain into two different chains.