Hard Forks and Soft Forks

On a blockchain, there are times when a part of the crypto community wants to bring about changes in the protocol due to their dissatisfaction with the current system. As a result, the network splits and produces a new blockchain running on a new protocol. This event is known as forking.

It has a lot of impact on the crypto community as a whole. This article covers the different types of forks and their effects. 

Find out more in the following sections.

What is a hard fork?

When blockchain members bring radical changes to a blockchain protocol, it is called a hard fork. You can consider it as a permanent diversion from the blockchain’s latest version leading to the creation of a new blockchain. 

The old blockchain keeps following its protocols while the new one runs as a separate entity with its own rules. Also, when a blockchain hard forks, it is not backwards compatible. The older version does not see the newer version as valid. 

There are various reasons why a hard fork may occur on a blockchain. You can consider hard forks as necessary upgrades needed to improve the network as a whole. Community members can implement a hard fork for correcting security vulnerabilities, adding functionality, reversing network transactions, resolving disagreements among members, and much more. 

One interesting thing to note is that hard forks can also be accidental. Though, this kind of hard fork gets quick resolution and hardly creates a fuss for the whole crypto community to notice. It happens when two miners find the same block at the same time.

The network protocol distributes consensus, and they see that block as valid and continue their mining activities on different chains until they or another miner adds another block. 

This new block determines which chain becomes the longer one. The shorter one is then abandoned to maintain consensus, and all miners move to the longer one. They abandon the shorter chain as they would be mining on a fork of the network, and it will not be profitable for mining.

You must keep one thing in mind in this regard. In such cases, the miner who found the abandoned block loses the block and transaction fee rewards. Transactions of this block will not be invalidated as when it was found, both blocks contained the same transactions and were identical. 

There are a lot of famous hard fork examples. Some of them are: 

• DAO hack hard fork

Upon its launch in 2016, Ethereum launched a DAO (Decentralised Autonomous Organisation) for crowdfunding. The DAO successfully raised $150 million worth of Ether during that time, but its algorithm had a major flaw. This flaw allowed hackers to withdraw $60 million worth of Ether from 11,000 investors. 

Ethereum community members debated what to do, and finally, there was a hard fork implementation on the network. This rolled back Ethereum’s transaction history to the point of time before the attack and reallocated the stolen Ether to a smart contract for investors to withdraw their funds. The new blockchain retained Ethereum, and the old one took Ethereum Classic as its name. 

• SegWit2x and Bitcoin Cash hard fork

SegWit2x was an upgrade to improve scaling on Bitcoin. It aimed to implement Segregated Witness and increase the block size limit from 1 MB to 2 MB. The decision for this implementation was on 23 May 2017 in the New York Agreement. It was controversial because miners and business owners made this decision representing over 85% of Bitcoin’s network hash rate. 

The agreement participants decided that a soft fork would implement SegWit, and the new block size limit update would be done using a hard fork later. This affair was controversial as it did not include Bitcoin and Bitcoin Core developers. 

In response to this controversial meeting, Bitcoin users wanted a user-activated soft fork. Their desire was also to implement the Bitcoin Improvement Proposal (BIP) 148, which suggested the implementation of SegWit as SegWit2x was vulnerable to making Bitcoin prone to replay attacks. 

SegWit2x supporters feared that this plan may not see implementation and decided to fork Bitcoin. Thus Bitcoin Cash (BCH) came into being. 

What is a soft fork?

In the case of a soft fork, there is no formation of a new blockchain. It is so as all users accept the new update, which becomes the currency’s new set of standards. All changes are backwards compatible with older versions. These changes generally bring new functions and features at the programming level that do not change the blockchain protocols. You can consider it as a software upgrade on your PC or smartphone. 

Upon implementation, a soft fork leads to invalidating previously valid transaction blocks. Only a majority of miners need to update to enforce the new rules. 

You can also see a soft fork implementation on a blockchain when there is a temporary divergence due to miners using non-upgraded nodes. They unknowingly violate a new consensus rule their nodes do not know about. 

When a soft fork occurs, all the blocks with the new update keep working on the old blockchain protocols. Therefore all old clients can accept them. However, if community members want to reverse a soft fork, they must implement a hard fork. It is so as soft forks only allow the set of valid blocks to be a proper subset of the valid pre-fork blocks. 

Let’s take the example of a soft fork on Bitcoin for your better understanding. After a soft fork, blocks from miners using the old software version face rejection, so they need to upgrade. As more miners upgrade to the latest version, the chain with the predominantly new blocks becomes the longest. 

This increases the number of orphan old version blocks and forces more miners to upgrade. As the new blocks are acceptable to both the old and new nodes, the newer version blocks eventually prevail.   

Initially, Bitcoin did not have a block size limit. The size of 1 MB was introduced by a soft fork later on.

Final word

Both hard forks and soft forks have their effects on users. When a cryptocurrency undergoes a hard fork, it becomes prone to a 51% attack. Soft forks do not have this disadvantage; miners must upgrade to the new software to get the latest benefits. 

If you are an investor or crypto coin user, knowing these terms help. If such a situation occurs, you will know exactly what to do and even guide your fellow investors.