The world of cryptocurrency is always changing and thanks to the public and transparent nature of the blockchain, it’s opensource for anyone to see. The strength of cryptocurrency is that it depends upon a blockchain, or the digital ledger upon which cryptocurrency transactions are recorded.
Current blockchain transactions follow the same rules as all of the transactions before them unless a change is made. Changes to the code of a blockchain can create all kinds of issues for participants looking to trade coins and create blocks. These code changes are categorized as hard forks and soft forks.
What is a Hard Fork?
A hard fork is a major change to the code of a blockchain that results in a permanent divergence.
Just like the word “fork” is used to describe a single path that suddenly splits into two, a fork in the blockchain creates a divergence or split in the path of the blockchain. This allows two blockchains to form from the original, essentially creating two forms of cryptocurrency.
During a hard fork, the blockchain divides to become two forms of the cryptocurrency. One of the forks is the same as the original blockchain, with no changes made. The other fork, however, incorporates the changes. There are two versions or prongs of the original that are no longer identical to each other, and the changes are not backward compatible, meaning miners working on the new chain cannot validate blocks that use the old code. These two codes can, however, coexist comfortably as different cryptocurrencies and different blockchains.
There are several potential outcomes of a hard fork. One possibility is that the new version is picked up by the community and added to, while the old chain is abandoned. The new and elongating blockchain becomes the new standard and the old one is forgotten. Another possibility is that both blockchains remain valid with two different ledgers and are both updated by their respective communities (like Bitcoin and Bitcoin Cash).
But why would anyone want to create a hard fork? The reasons for a hard fork can vary. Sometimes the hard fork is created to test out or implement a significant change to the code’s defining parameters. Other times, it is done to create a new asset that is similar to the original cryptocurrency. In some instances, the hard fork is accidental and quickly resolved.
No matter what the reason, a hard fork in the blockchain is the way to implement change to the way a blockchain functions. Participants must upgrade their software to continue participating in the chain. If they don’t, they are separated and cannot validate any new cryptocurrency transactions. They will only be able to participate in the old chain.
What is a Soft Fork?
A soft fork is a change to the code of a blockchain that remains compatible with older versions.
Unlike a hard fork, which creates a divergence, a soft fork in the blockchain is more of an upgrade to the cryptocurrency. Whenever the code changes within a blockchain, participants must update their software, so their transactions remain viable. With a soft fork, participants remain compatible with both old and new code as they upgrade.
One of the biggest benefits of a soft fork is the convenience for participants. A soft fork can implement upgrades and changes without splitting the community and thereby weakening the value. However, soft fork developments do need to ensure that any new rules fit well with the old rules to ensure this backwards compatibility, unlike a hard fork that doesn’t require compatibility.
Who Creates the Hard Forks and Soft Forks?
The governance of different blockchain’s vary. Implementing a successful hard fork or soft fork requires a large portion of the miners and/or coin holders to agree to the specific changes and manage the updates to the code accordingly. For the changes to the blockchain to really take effect, it needs the support of participants. Without support, the changes won’t be viable and the blockchain will become an orphan.
In theory, just about any participant can create a fork in the blockchain, so what prevents everyone from creating their own version of a cryptocurrency? In reality, not much. Of course, the value of the cryptocurrency comes from the demand for the coin. If a coin does not have high demand or much usage, it doesn’t have much value. The community needs to support a coin to make it valuable, so setting up hard or soft forks without careful planning will result in abandoned segments with no worth.
It takes a big and active community to support a particular type of cryptocurrency. Like any software, updates and adjustments are necessary for optimal operations. Hard forks and soft forks are an inevitable part of keeping cryptocurrency valuable and workable, so every participant should become familiar with how they work and how they can benefit from them when they happen.