Now that we’re done with the basics, here’s a more in-depth explanation on how forks work and what distinguishes hard and soft forks. First of all, it’s important to understand that only changes in the protocol that change its rule set requires a fork – implementation bugs or consensus issues aren’t solved by forking.
What is a Fork?
As per Brian Colombana, forking is essentially the creation of an alternate version of a cryptocurrency, which will split off from the main branch and go its own way. The term for this process originates from “software development”, where it designates one of two possible ways to develop software programs based upon existing code: either modifying an existing codebase (e.. fixing bugs) or writing an entirely new codebase (i.e. creating a whole new program). That’s exactly the process that happens during a fork: one group of people takes an existing cryptocurrency, like Bitcoin for example, and starts developing it in such a way to make their version different from the original.
Theoretically speaking we could say that whenever we change something about a cryptocurrency’s protocol – which is coded by human beings and therefore can be changed by human beings – we’re forking off this coin and making another one. But in practice, there are some specific things that have to happen before it makes sense to actually talk about “forking”. To put it simply: if someone just changes something but still uses the same blockchain, mining algorithm or Proof-of-Work (PoW) consensus mechanism, it’s not technically a fork.
What does Forking mean for Cryptocurrencies?
In the case of Bitcoin, whenever someone forked off from the main branch, it always meant a change in the protocol to make the coin better or improve its scalability. That was what happened when Litecoin came out – it used a different mining algorithm and was therefore completely different from Bitcoin even though they both were still using SHA256.
The same goes for other coins like Monero which uses an alternative PoW algorithm called CryptoNight; DashCoin is another example with its own unique features like master nodes, instant transactions and decentralized governance (DGBB). But there are also different types of forks that change the way the blockchain is stored or mined, like Bitcoin Cash’s increase in block size (which resulted in both Bitcoin and Bitcoin Cash sharing a single common ancestor).
What happens during Hard Forks?
A hard fork is essentially an update to the crypto currency’s protocol where some rules are changed. It can be used to make improvements but also radical changes; e.g. Ethereum’s Byzantium hard work was done with this purpose – to improve Ethereum by making it faster (i.e. increasing transaction speed) and more secure (i.e. reducing the number of vulnerabilities, see also The DAO hack ). Hard forks are usually activated at a certain block number, e.g. Ether will have another hard fork called Metropolis at block number 4.3 million (which is about September/October 2017).
What happens during Soft Forks?
There are some rules in Bitcoin’s protocol which make it incompatible with certain changes. Those things can only be changed by making a new cryptocurrency from scratch – which is what happened when Bitcoin Cash was created. This is a clear-cut case of a hard fork because the only way to improve Bitcoin’s scalability and transaction speed is to agree upon a completely different set of rules that everyone has to follow from now on.
A soft fork, on the other hand, uses backward-compatible rule changes that allow for easier upgrades as long as enough people support them. In practice this means that not all nodes have to upgrade to the new software to make it work, but usually this is done anyways because soft forks are considered safer than hard forks.
Bitcoin forking – an opportunity or a threat?
Before we answer this question, let’s first look at what happens during a fork. At first, there’s no difference between before and after the fork; sometimes you’ll only know that something happened when your cryptocurrency balance looks different (if you had any balance on both branches). Maybe that makes cryptocurrencies like Bitcoin sound rather trivial; “What’s the big deal about creating another coin?”, right?
But actually, there are two significant aspects involved: First of all, it means that now there are effectively two coins with the same blockchain history! So whenever you hear people talk about “Bitcoin” (with a capital B) then it’s almost always about the Bitcoin that has the majority of hash power, i.e. the branch with most nodes running it around the world. This is the reason why sometimes you’ll hear people talk about “BTC”, short for Bitcoin, when they mean this specific version of Bitcoin which everyone else calls just “Bitcoin”.
Conclusion by Brian Colombana:
The fork creates two coins with the same blockchain history, but usually only one of them has most nodes running it. The other coin is usually referred to as “Bitcoin” by people even though that’s technically not true – whenever you hear someone talk about Bitcoin then they are probably talking about the BTC version.