Blockchain is the decentralized, open-source software that powers cryptocurrencies such as Bitcoin and Ethereum. A fork happens when a community modifies the blockchain’s protocol or basic set of rules.
Most blockchains are open-source software that anyone can contribute to, which is how cryptocurrencies like Bitcoin and Ethereum work. The term “blockchain” describes the actual blocks of data that make up cryptos (imagine a long train). You can trace these blocks back to the first transaction that ever happened on the network. Additionally, since blockchains are open-source, their communities develop and maintain the underlying code.
A fork happens when a community modifies the blockchain’s basic set of rules or protocol. Such changes cause the chain to split, resulting in a second blockchain that shares all of its records history with the original. However, the difference is that the second chain is headed in a new direction.
The Reason Behind The Importance of Forks
Numerous cryptocurrencies have unique development teams tasked with making improvements, and changes to the network. This process is comparable with changes to internet protocols and how these changes can allow web browsing to improve over time. Sometimes a fork is necessary to add additional features to a cryptocurrency, or simply increase security.
Simultaneously, it is also possible that developers of new cryptos use a fork to generate new ecosystems and coins. It is critical to differentiate between two types of forks which are the following:
- Soft fork
- Hard fork
What is a Soft Fork?
A soft fork is basically a software update for the blockchain. It becomes a new standard for cryptocurrency as long as all users accept it. For example, soft forks have helped add new functions or features to Bitcoin and Ethereum, usually at the programming level. Consequently, the changes made through a soft fork are backward-compatible with the pre-fork blocks because the end result is a single blockchain.
What is a Hard Fork?
A hard fork occurs when the code changes in such a way that it is no longer compatible with earlier blocks. This scenario results in the blockchain splitting into two parts: the original blockchain is the first, and the new version that follows the new set of rules is the second.
In other words, a hard fork creates a new cryptocurrency, which is how many popular coins came into existence. For example, Bitcoin Gold and Bitcoin Cash are cryptocurrencies created through a hard fork from the original Bitcoin blockchain.
However, keep in mind that a hard fork does not always result in two blockchains. Sometimes, the old chain remains abandoned and only the new one continues being used. Although rare, such a hard fork may occur when there are no conflicts inside the team regarding the direction of the new cryptocurrency, meaning everyone agrees on the necessary changes.
Therefore, the result is a new chain with modified rules, to which all coins are migrated, and transactions take place on it throughout, while the “old” chain is no longer in use.
Why do Forks Happen?
Blockchains need to go through updates like all software. The most common reasons for these updates include:
- Settling disputes within the community regarding the direction of cryptocurrency
- Addressing security risks
- Adding/increasing functionality
How Forks Affect The Crypto Landscape
To explain the effect of forks on the crypto landscape, we’ll observe an example using the popular cryptocurrency Ethereum.
Ethereum’s design relies on using “smart contracts” to operate. These “contracts” are pieces of code (algorithms) that automatically perform a predetermined set of actions after meeting certain criteria. Examples of smart contract applications include everything from DeFi dApps to logistics tools and games.
So, the Ethereum blockchain is the platform that runs all these apps, and as such, is comparable to a computer operating system. Following this analogy, the various Ethereum forks — Ethereum Classic and Ethereum 2.0 — are basically newer versions of an operating system. These newer versions add efficiencies or new features that may have been missing in the prior versions.
Therefore, you can think of a soft fork as a “software update” (like when your phone asks for you to upgrade to the latest OS). On the other hand, a hard fork is more like an entirely new operating system (Mac OS and Linux are both evolutions of the old UNIX platforms).
Disclaimer: For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.
