What is Soft Fork and Hard Fork?
Hard forks and soft forks are important components of blockchain technology. For example, according to the data Coinmarketrate.com, the Bitcoin blockchain is at the limit of its capabilities. Approximately every ten minutes, a new block is created containing numerous data on countless transactions. These blocks can be used to verify the validity of a transaction. The size of these blocks cannot exceed one megabyte in the BTC blockchain. To get around this limitation, a fork is possible.
Let’s figure out this process together.
What are soft forks
A soft fork (or fork) is a change in the blockchain protocol in which functionality is changed or added without causing complex structural changes.
These forks force nodes that have decided to accept the upgrade to treat old blocks and transactions as invalid. However, nodes that still adhere to the old consensus consider the new transactions and blocks valid.
Thus, a soft fork has backward compatibility, which is very different from Hard forks, in which old nodes do not perceive old blocks and transactions as valid.
This type of modification of blockchain software is good because it is not necessary that all miners on the network agree to launch a new code, it is enough that most of them implement it. This allows you to implement improvements faster and avoid problems within the community.
Many cryptocurrencies throughout their history have used these forks to improve network capabilities, fix bugs, or integrate new functionality. And all this without the need for a hard fork, which, as a rule, is more destructive for the network, and sometimes leads to the creation of another parallel cryptocurrency.
A well-known soft fork of Bitcoin is the SegWit update, which allows you to increase the block capacity by removing signature information from transactions, and Taproot – soft forks, unanimously accepted by the community. If the soft fork does not pass, then the hard fork is performed. But, more on that later.
How the soft fork works
New transaction types can often be added in a soft fork. The only thing that is necessary is that the participants (sender and receiver) and miners understand this type of transaction.
To achieve this, it is necessary to make the new transaction perceived by old customers as a “pay anyone” transaction (in a special way), and force miners to reject any blocks that include these transactions if they do not comply with the new rules.
This is how Pay to Script Hash (P2PH) transactions were added to Bitcoin.
A soft fork can also occur when there is a temporary discrepancy in the blockchain due to the fact that miners using an outdated version of the software violate the new consensus rules because they are not aware of them, since they have not been updated.
Soft forks do not force anyone to update to maintain consensus, since all blocks with new rules also follow the old ones, so old clients are accepted.
If user nodes switch to a client with soft fork improvements, and then for some reason miners decide to return to the client preceding this fork, nodes with an updated client will break the consensus as soon as a block appears that does not comply with their client’s rules.
In order for a soft fork to be implemented, most miners (according to the general hashrate) must launch a client that recognizes it. The more miners adopt these new rules, the more secure the network will be after the process is completed.
If 75% of miners recognize the fork, 25% of the created blocks will not comply with the new rules. The last blocks will be valid for the old nodes that do not know the new rules, but will be ignored by the new nodes.
Financial implications of soft forks
Forks can greatly affect the value of cryptocurrencies. This is due to the fact that serious changes are taking place in the fundamentals of cryptocurrency.
For example, in the case of a soft fork, the changes may be aimed at modifying the security of the cryptocurrency consensus mechanism. These changes may lead to an increase or decrease in the price, depending on how the society perceives these changes. That is, whether they will be favorable or unfavorable.
If cryptocurrency miners attempt to introduce a soft fork and fail, this may lead to a drop in the asset price. This is due to the fact that the market perceives the mining community as inflexible and hostile to change.
The good news is that soft forks are not very disruptive to the blockchain, which makes volatility not too important.
Although they are not as important as hard forks, there is still a big impact on the market.
What is a Hard Fork
A Hard Fork is a consensus change that is not backward compatible. This happens when a behavior that was previously valid is no longer valid.
To maintain consensus during a hard fork, all nodes must perform an update. Otherwise, nodes that have not updated will reject transactions and blocks as invalid under the new rules, while nodes with new software will perceive them as valid.
That’s why hard forks should be avoided in any cryptocurrency if you don’t want to suffer the consequences. This is a radical change in the network protocol, which means that blocks and transactions that were valid before are no longer valid.
Forks start from a developer or a member of the community of this cryptocurrency who is dissatisfied with the functionality offered at the moment.
During the hard fork, nodes with the new blockchain software will no longer accept previously valid blocks, creating a permanent discrepancy with the original blockchain.
When new rules are added to the code, a fork is created in which:
- One of the ways to follow the new recommendations is an updated blockchain.
- The other way continues to work with blocks that were valid before.
If the nodes with the old software realize that the new improvements will not be long in coming and decide to upgrade, they will eventually switch to the new blockchain. It may be the other way around: new nodes refrain from upgrading.
In any case, nothing special happens in this case.
But when the nodes take a firm position on which software to use, and no one gives in, then a hard fork occurs.
How Hard Forks work
A hard fork can happen on any blockchain, not just Bitcoin. This is because the technology works the same for all cryptocurrencies, except for some differences, which in this case do not affect this event.
We can understand blockchain as a set of blocks that contain information about users’ funds. It is the miners who have the opportunity to implement the rules and create new blocks, updating this information.
However, all miners must agree to the rule change, and this determines whether the block is valid or not. Therefore, when we want to change the rules, we need a fork indicating a deviation from the original protocol.
It is the developers who implement these changes into the code, and then the nodes, both mining and conventional, decide on their adoption.
The problem with hard forks is that the community does not agree with the changes, and some decide to go one way and others the other.
In the process of the hard fork, many cryptocurrencies with similar names appeared. Such is Bitcoin with Bitcoin Cash, Bitcoin Gold, etc. Or Ethereum with Ethereum Classic.
Currently, it is difficult to track all the hard forks that the main cryptocurrency has undergone, since anyone can take the code and create their own version at any time.
Why carry out a hard fork
There are many reasons why someone would want to implement a hard fork, especially if you are a developer and want to solve an important security problem or implement software improvements.
You can also spend it if you need to add new functionality to the blockchain or cancel transactions.
What is the difference between hard forks and soft forks?
In fact, these two types of forks are similar in that the platform code is being changed. The old version may even continue to exist for a while.
The difference is that with a soft fork there will be a single chain in which there are nodes working with different versions of the code. Here the old and new versions work side by side.
On the other hand, with a hard fork, the old and new versions work simultaneously, but each of them checks different blocks, which makes one of them incompatible with the other.
In both cases, forks generate a split, but with a hard fork, the blockchain is divided into two, and with a soft fork, a single blockchain with nodes having different versions is preserved.
Types of Hard Forks
There are 3 broad categories of hard forks:
- Planned
The planned hard fork is an update that was pre-determined in the project roadmap, and everyone knows about it. It is similar to an update that is done for any kind of software, for example, for your computer or mobile phone.
The planned hard forks are welcomed by the community, as it is an initiative to improve the capabilities of the blockchain. On the other hand, developers and the community accept the new blockchain almost unanimously, gradually abandoning its less useful version.
- Unplanned
This type of hard fork occurs when internal disagreements arise within the project when solving a specific problem. As a result of these disagreements, part of the community is rejected, creating a new chain.
In this case, he lacks the unanimity that we saw in the example above, as well as the support of part of the community. Therefore, as a result, a new cryptocurrency is created that competes with the previous one.
The best example of this is the hard fork that led to the emergence of Bitcoin Cash, which was created by those who believed that Bitcoin had scalability problems. Their solution was to increase the size of the BTC block from 1 MB to 8 MB, which was later increased again to 32 MB.
- SPIN-OFF
Due to the fact that cryptocurrencies, especially BTC, have open source code, their code is available to anyone who wants to change and create their own project with various functions.
These coin spin-offs can be created by anyone: just take the code of the cryptocurrency you like and change the values to create a completely different offer
An example is Litecoin, which is a fork of the original Bitcoin. The differences are that the first one has a shorter block confirmation time and a larger overall offer.
Conclusion
A fork is a very large change in the blockchain protocol, as a result of which the blockchain can split into two branches. One that follows the old protocol, and the other that adapts to the new version.
During the hard fork, the owners of the original token will also receive a new token, but miners will have to choose which of the two cryptocurrencies to mine.
A hard fork can happen on any blockchain, not just Bitcoin, which has experienced many similar cases in the past.