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Explained: What Is a Hard Fork & How Does it Work?

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If you’re into cryptocurrency, you may well have heard of hard forks. But what are they, and are they important? In this piece, we’ll discuss what hard forks are, why they happen, the difference between hard forks and soft forks, and why they are an important part of the blockchain.

Additionally, we’ll also discuss some examples of hard forks that have happened, such as Bitcoin Cash and Ethereum Classic.

What Is a Hard Fork?

Essentially, a hard fork splits a blockchain into two, with a change in the blockchain’s code meaning there are now two versions.

A hard fork creates two versions of the blockchain which are not compatible with each other. This means that nodes running on the new version of the blockchain will not recognize transactions being made on the old version, and vice-versa. All nodes on the blockchain must agree to the change for the hard fork to happen.

Why Hard Forks Happen? 

Generally, blockchain hard forks occur as a way to meet the needs of the community using/mining a particular cryptocurrency. They may be necessary because of faults on the older version of the software, to add new functionalities, or because of disagreements among the cryptocurrency’s community over the direction that the cryptocurrency is headed.

Indeed, at the time of writing, many in the world of crypto are looking forward to the long-awaited Beacon Chain Ethereum 2.0 hard fork, which is set to deliver several upgrades to Ethereum 2.0, such as giving nodes the capability to run on mobile devices.

On the other hand, hard forks can also be a part of the promotion campaign to attract attention to a new cryptocurrency. For example, everyone who owned Bitcoin in October 2017, were eligible to bag the same amount in Bitcoin Gold in the way of an airdrop. This was to mark the Bitcoin Gold hard fork.

A hard fork can occur in any blockchain, not only in the Bitcoin network or on Ethereum, for instance, as was the case with the Cardano Mary hard fork in March 2021. 

Other Reasons For Hard Forks

There are actually various reasons that hard forks can happen, aside from the reasons mentioned above.

Another reason a hard fork occurs is to refund users if a security breach or hack happens on a blockchain network. In such an occurrence, transactions made from a specified date by attackers are no longer valid. This happens because normally developers quickly fix newly-exploited vulnerabilities after the hack. 

Such vulnerability in the code of the DAO project was actually the reason why Ethereum Classic hard-forked — we’ll discuss in detail later.

In a popular protocol such as Bitcoin, various coders from all over the world work on its improvements constantly by proposing specific upgrades. In the case of Bitcoin, there’s a whole list of BIPs (Bitcoin Improvement Proposals). As for Ethereum, there is a list of EIPs (Ethereum Improvement Proposals).

A good example of what’s going on during these forks was given in 2019 by Ethereum’s founder Vitalik Buterin himself: “Over the course of the next one to two years, we’re going to be on this interesting journey together of taking the Ethereum ecosystem and upgrading it to a new and more secure … on top of it, so things coming soon, more developments to rollup, more developments to scaling technology, improvements to security, including wallets, including clients, including a lot of things, improvements to usability, improvements to privacy.”

Hard Forks vs. Soft Forks

The difference between soft and hard forks

Moving on to the next part of the discussion, let’s take a look at the difference between hard forks and soft forks now, but first – what are soft forks?

soft fork is a software upgrade that is backwards compatible with older versions of the blockchain. This means that those miners who haven’t yet upgraded to the later version of the software are still able to participate in validating and verifying transactions.

It is much easier to implement a soft fork than a hard fork as only a majority of miners need to upgrade.

Keep in mind, however, that a miner who hasn’t upgraded yet will be affected by the soft fork anyway. 

Say, you produce a 1 megabyte block as a non-upgraded miner. You’re still able to validate incoming transactions. However, the update allows only for 8 megabyte blocks to be added to the ecosystem, so you can’t add your blocks – sorry.  

With that in mind, you can say that soft forks act as an incentive for miners to upgrade their software, or face being hindered in their functionalities.

Examples of Hard Forks

In general, three possible case scenarios are most likely to happen when a community decides to hard-fork:

  • One blockchain stays dominant after the hard fork, resulting in the other blockchains having low community adoption and/or value. 

For instance, Bitcoin Classic (BXC) and Bitcoin Unlimited are supported by very small groups of mining pools these days, whereas good old Bitcoin is “still the one I love“, as Shania Twain would sing – it’s the king of cryptos amongst the crypto community and beyond.

  • Both blockchains are adopted, co-existing and operating independently of one another with roughly equal community adoption and/or value. 

OK, no really good examples here, yet, a moderately appropriate example is Roger Ver’s Bitcoin Cash, the blockchain that implemented an increased block size of 8 MB in 2017 (and a 32 MB block size in 2018). Now the digital asset on top of this platform, BCH, is comfortably inside the top 20 cryptocurrencies by market cap, and so it’s fair to say that it has been a success in its own right.

Of course, BCH is not Bitcoin in terms of the price but look at the other hard forks that we mentioned here – they’re selling for under a dollar!

  • Both blockchains are adopted, but one of them is favored. One of the two chains becomes the dominant chain in terms of adoption and value. 

Now, this is where the example of Ethereum Classic is fitting, so let’s look at it in more detail.

In April 2016, a digital decentralized autonomous organization, DAO, was installed on the Ethereum blockchain in order to create a form of investor-directed venture capital fund. 

In July 2016, hackers exploited a vulnerability in the DAO code , stealing $50 million worth of ETH. As a result, the Ethereum blockchain was hard-forked at block 1,920,000 to restore all the funds of those who had suffered losses in the hack. This was controversial and led to maintaining the original unforked blockchain as Ethereum Classic (ETC), thus breaking the network into two separate active blockchains, each with its own cryptocurrency. 

Without any doubt, Ethereum is the dominant force here. Ethereum is by some distance the 2nd biggest cryptocurrency by market cap, while at the time of writing, Ethereum Classic doesn’t even make the top 50.

Talking about dominance – as we all know and have already mentioned, Bitcoin is the most popular cryptocurrency out there.

Over recent times, the interest towards ‘digital gold’ has been only growing. As a result, so has interest towards its history, including its hard forks.

Let’s briefly look at the history of Bitcoin hard forks:

  • Bitcoin Classic was a proposed hard fork from the original Bitcoin blockchain (Bitcoin Core) that aimed to increase the maximum possible size of transaction blocks. Despite some initial promise, Bitcoin Classic has failed to be widely embraced by the Bitcoin community.
  • Bitcoin Unlimited allows users for bigger block sizes. However, concerns that miners with bigger resources would dominate the profit-taking means that it has also failed to take off.
  • Bitcoin SV is the coin born out of what was described as a “civil war” in two competing Bitcoin cash camps. The first camp, supported by entrepreneur Roger Ver and Jihan Wu of Bitmain, promoted the software entitled Bitcoin ABC (now referred to as Bitcoin Cash (BCH), which would maintain the block size at 32 MB. It is the most successful cryptocurrency coined out of the Bitcoin hard forks to date. The second camp, led by Craig Wright and billionaire Calvin Ayre, put forth a competing software version Bitcoin SV, short for “Bitcoin Satoshi Vision”, which would increase the block size limit to 128 MB.
  • Bitcoin Gold hard-forked in October 2017. This fork was implemented in the hope that mining on graphics cards (instead of expensive ASICs that were used to mine Bitcoin – these were now not allowed as a result of the hard fork) would make mining more accessible for normal people.

So, how many Bitcoin improvement proposals, do you think, have been already made over the past decade? 

The answer is a lot. 350 to be exact, but not all of them made it to hard forks, of course.

However the night is young, blockchain is a teenage technology brought to life only a little more than 10 years ago, and we’ll no doubt see a lot more hard forks in the future.

The Bottom Line

So, in essence, a hard fork is a far-reaching change of the blockchain that requires all the nodes running in the distributed network to move to the newer version (that supports readjusted functionality). 

On the other hand, a soft fork is a software upgrade that is backwards compatible with older versions of the blockchain. This means that those miners who haven’t yet upgraded to the later version of the software are still able to participate in validating and verifying transactions (although they are incentivized to upgrade).

Hard forks and soft forks are important in the context of network development. They allow the community to make sufficient changes and upgrades despite the lack of centralized governance.

Thanks to hard forks, blockchains and cryptocurrencies integrate new features and improvements as they’re developed. Without those, the ecosystem would have needed a centralized server to control everything that’s happening in the network. Luckily, we’re not stuck with the centralized servers — but we’re definitely stuck with hard forks. 

Disclaimer

This article is intended for and only to be used for reference purposes only. No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Please seek professional advice before trading.

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