Key Takeaways:
- A fork is a code modification that is similar to the original blockchain; the two ‘prongs’ comfortably coexist.
- A hard fork is a radical change in a cryptocurrency protocol that is incompatible with the previous blockchain versions.
- A soft fork is a change in a cryptocurrency protocol that keeps it backward compatible.
What Is a Fork in Blockchain?
In programming terms, a fork is an open-source code modification. Usually, the forked code is similar to the original blockchain but with significant modifications, and the two ‘prongs’ comfortably coexist. Since cryptocurrencies are decentralised networks, all participants in a network — known as nodes — need to follow the same rules in order to properly work together. That set of rules is known as a ‘protocol’.
Typical rules in a protocol include the size of a block on a blockchain, the rewards miners receive for mining a new block, and many more. The decentralised nature of blockchains means that nodes on the network must be able to come to an agreement (i.e., consensus) as to the shared state of the blockchain.
Learn all about blockchain — from the Byzantine Generals Problem to consensus — in our University article What Is Blockchain?
The Function of a Fork
In the world of cryptocurrencies, a fork is more often used to implement a fundamental change or create a new asset with similar (but not equal) characteristics as the original.
In a unanimous protocol where network nodes all agree, a single blockchain contains verified data (transactions) that the network asserts to be correct. However, if there exist nodes in the network that can’t come to an agreement on the state of the blockchain, a split (fork) into two branches is possible.
There are two types of forks in crypto: hard forks and soft forks.
What Are Hard Forks?
A hard fork is a radical change in a cryptocurrency protocol that is incompatible with the previous versions. This means that nodes with the older protocol (pre-fork) aren’t able to process transactions or push new blocks to the post-fork (newer) blockchain; similarly, any transaction on the forked (newer) chain is not valid on the older chain. All nodes and miners have to upgrade to the latest version of the protocol if they want to be on the new forked chain.
Examples of a Hard Fork
Ethereum Shapella
The Ethereum Shapella hard fork went live in April 2023 as part of the Shanghai Upgrade. One of its functions is to finally allow validators to unstake ETH from the Beacon Chain.
Read all about the Shanghai Upgrade.
Planned vs controversial forks
Depending on the situation, hard forks can either be planned or controversial.
For planned forks, nodes voluntarily upgrade their software to follow the new rules, leaving the old version behind. The ones who don’t update are left mining on the old chain, which very few people will use.
But if there’s a disagreement within the community about the upgrade, the fork is considered controversial. At that point, the protocol is usually forked into two incompatible blockchains — generating two different cryptocurrencies. Both of the blockchains have their own community, and the developers choose one they believe in or otherwise prefer.
Since a new fork is based on the original blockchain, all transactions from the original blockchain are also copied into the new fork. For instance, if a user has 100 coins of a cryptocurrency called Coin A, and a hard fork based on that cryptocurrency creates a new cryptocurrency called Coin B, the user also gets 100 coins of Coin B.
What Are Soft Forks?
A soft fork is a change in a cryptocurrency protocol that keeps it backward compatible. In essence, non-updated nodes are still able to process transactions and push new blocks to the blockchain, so long as they follow the new protocol rules. This kind of fork requires only a majority of the miners upgrading to adjust to the new rules, as opposed to a hard fork, which requires (almost) all nodes to upgrade and agree on the new version.
Example of a Soft Fork
Bitcoin SegWit
Segregated Witness, commonly known as SegWit, is a soft fork upgrade to the Bitcoin protocol that was activated in August 2017. It increased the transaction capacity of the Bitcoin network by allowing more transactions to be included in each block.
SegWit separates the digital signature from the transaction data, resulting in a reduction in the size of transactions. This separation increases the effective block size limit, enabling more transactions to be included in each block without increasing the block size limit itself. This increased capacity reduces transaction fees and increases the speed of BTC transactions.
As a soft fork, SegWit is a backward-compatible upgrade to the Bitcoin protocol that allows for a gradual adoption by the network’s users. This means that users who do not upgrade to the new version of the software can still participate in the network, but they are not able to take advantage of the benefits of SegWit.
Final Words on Blockchain Forks
Forks are an important part of crypto projects and their digital assets. They can divide a user community into proponents and opponents of the updates that come with a fork, as well as influence crypto prices. Forks are one factor to keep an eye on when holding or considering buying crypto coins and tokens. Before buying, read our 101 on how to DYOR for crypto projects.
Due Diligence and Do Your Own Research
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