Forks are updates that bring new technical features to the blockchain. Since these networks are constantly moving and evolving, these updates play a crucial role in the development of cryptocurrencies.
Hard forks vs. soft forks
There are two main types of Bitcoin forks: a hard fork and a soft fork. The biggest difference between the two is backward compatibility.
A Bitcoin hard fork is an upgrade that entails a permanent split from the older version of the blockchain. This means that the older version of the blockchain is then left behind and the permanent split means that older versions cannot accept transactions created with the new chain.
A permanent split means that a whole new cryptocurrency will be created. When these splits are planned, people using the blockchain will have to voluntarily update their software to follow the new rules. As a result, those who choose not to update will be left on an outdated chain. In most cases, the outdated chain will fiddle away as people tend to update their software.
Sometimes, hard forks can be controversial because when a fork occurs, there will be two chains with respective communities that believe in a different future for crypto. However, the developers of each chain will continue to progress in the way they believe is best.
Examples of Hard forks:
- Bitcoin Cash (BCH): This split occurred on August 1, 2017, due to many developers wanting to improve Bitcoin’s scalability issue. They proposed to increase the blockchain’s block size so more transactions could be included within each block. However, many people did not agree with these updates. This created a division within the Bitcoin community and led to the hard fork known as Bitcoin Cash. Bitcoin continued to run its old protocol while Bitcoin Cash was created with larger block size. At the time of writing, 1 BCH is valued at hundreds of dollars and this coin is dubbed as the largest Bitcoin fork.
- Ethereum Classic (ETC): Another example of a hard fork is the Ethereum fork that split the blockchain into Ethereum (ETH) and Ethereum Classic (ETC). In June 2016, a hack on the Ethereum network led to the theft of millions of dollars. Because of this, there was a hard fork to reverse the hack on the Ethereum ledger—meaning stolen funds were returned to the original owners. While the hack was reversed on one branch, the other branch kept the hack in its official ledger. At this time, there are still some concerns over ETC’s scalability. Because of this, Ethereum remains to be the more popular option.
- Bitcoin Gold (BTG): Bitcoin Gold is a hard fork that occurred on October 24, 2017. It was created in order to use an algorithm that is different from what big mining companies were using. Instead of Application-Specific Integrated Circuits (ASICs), which are costly mining devices, Bitcoin Gold uses an algorithm called Equihash which isn’t easily translatable to ASICs.
The changes allow for more safeguarded systems such as unique wallet addresses that prevent hacks and scams. BTG was also created to make mining more accessible to users and to get back to the roots of Bitcoin’s creation. Apart from that, its transaction speed is five times faster than Bitcoin’s. While BTG is not considered as valuable as BTC, it has seen some spikes in mild popularity.
A soft fork differs from a Bitcoin hard fork in that it is backward-compatible, meaning it still enables older nodes—communication endpoints that allow BTC to be decentralized— to approve new blocks. So how does it work?
Instead of creating two new blockchains, it creates two branches that coexist with one another. With a Bitcoin soft fork, the blockchain history is shared up until the fork. In most cases, all older nodes will eventually update even if they don’t have to.
Also, a soft fork allows older and non-updated nodes to process transactions as long as they don’t break the rules of the new chain. Because of this, older nodes are encouraged to update for more efficient transactions. An example of a Bitcoin soft fork is Segregated Witness (Segwit).
SegWit works by segregating transaction data from the section that authorizes the transaction (otherwise known as the “witness”). It allows for more transactions in a block on the blockchain, and this allows for faster and more secure transactions.
Bitcoin forks and their impact
Despite the disagreements that have surfaced in their communities, Bitcoin forks generally have good intentions behind them. They aim to improve the technological features of a blockchain, whether it be in terms of scalability or their ability to be a transactional currency—and that’s something we can get behind.