It is one of the concepts that entered our lives with the unstoppable rise and development of the cryptocurrency industry. The idea behind Bitcoin was to create a decentralized alternative to cash and to create a cryptocurrency that is not under the control of any authority and is easy to transfer at low costs. After Bitcoin, many cryptocurrencies have emerged, and some of them are due to forks.
A fork occurs when a community or developers decide to make changes to a project. Many cryptocurrencies do not have a centralized authority, but networks they run on are updated and upgraded. The software of the Bitcoin blockchain is open-source. Therefore, anyone on the network can suggest software improvements and submit his suggestions to the community, and if the community approves, the code can be modified accordingly. In forks, the decision-making phase is vital. In some cases where the developers do not approve a project’s progress or do not want to be involved anymore, they may choose to go their separate ways and agree to perform a fork. In networks, there are two types of forks, and we call them Hard Forks and Soft Forks.
Hard Forks
A hard fork is basically the process of splitting one cryptocurrency into two separate cryptocurrencies. In this type of fork, a new blockchain with the same transaction history is created. These forks can be a result of a variety of reasons. Generally, the main purpose is to improve the source code of a cryptocurrency. For example, if you want to change an important rule of a protocol, such as the block size, a hard fork can be performed.
Hard forks occur when a community is divided in the absence of consensus. A hard fork means that validators on the newest version of a blockchain will no longer accept the older versions of the blockchain. As a result of this deviation, a new cryptocurrency and blockchain emerge. After the rules and protocol change on the old blockchain, a new protocol and set of rules are created. However, the old blockchain still works with the same rules. And the new blockchain continues on its way with new rules. You can examine a hard fork process in the image below.
There may be several reasons for a hard fork to occur. Developers may suggest a hard fork to fix the security issues of the old software and add new features. Also, a hard fork can be performed in the absence of consensus within a community. One of the most important examples is Bitcoin and Bitcoin Cash.
An Example From the Past: Bitcoin and Bitcoin Cash Hard Fork
When Bitcoin emerged, it had an important technology and philosophy, and these are the main reasons behind its popularity. However, over time, some issues with Bitcoin emerged, and the biggest issue was undoubtedly the “scalability”. The classic comparison in this regard is the Visa comparison that shows the ability to process transactions per second. While the Bitcoin network can process a maximum of 7 transactions per second, Visa can process 24,000 transactions. In 2017, the necessity of an improvement emerged due to the high density and too much delay of transactions on the Bitcoin network.
The Bitcoin community was divided as a result of the high density of transactions. The different views from each group were as follows: One group argued that Bitcoin would never be used for small payments, and it was not designed for that purpose. And the other group argued that the scalability issue must be resolved. The disagreement was not resolved, and as a result, the Bitcoin hard fork emerged in August 2017. In this way, Bitcoin Cash came into play. Bitcoin Cash was created to process 2 million transactions per day by increasing the Bitcoin block capacity. The term “cash” is in Bitcoin Cash because the developers think that Bitcoin Cash is more suitable for everyday use like cash. As a result of the hard fork, the same amount of Bitcoin Cash was given to those who had Bitcoin in their wallets.
Soft Forks
Soft forks are backwards compatible forks. There is no need to modify the blockchain itself in order to perform this update. This process is like updating an app instead of downloading a newer version. If the community approves the update, the project continues to work on the same blockchain. On the other hand, in hard forks, both old and the new blockchains are side by side. The soft fork process is as follows:
In soft forks, the approval of the process may vary depending on the protocol. While some protocols require majority acceptance, a soft fork can be performed in others with the approval of a few developers.
