Hard vs Soft Fork

A fork in the crypto world is seemingly much more complicated than its use in cutlery as a utensil. In reference to cryptocurrencies, a fork is generally linked to a split of one cryptocurrency into two distinct ones. In this quick guide, we will tell you why forks are a big deal and the differences between Hard Fork and Soft Fork. Let’s get started!

What are Forks?

Cryptocurrencies are decentralised and maintained by the community, mainly nodes. They need to follow some set of rules in order to work together, and this set of rules is called protocol. Whenever the community decides to add new features to a cryptocurrency or, create another one which they believe will be superior to the old one, forks will then occur.

There are primarily two types of blockchain forks: Soft Fork and Hard Fork.

Hard vs Soft Fork: What’s the Difference?

Hard Forks

A hard fork is a software upgrade which is not compatible with the older versions, also referred to as a permanent divergence. All old nodes have to upgrade their software in order to continue adding new blocks to the blockchain as a new set of consensus rules is introduced into the network.

For instance, the community decides to increase the block size from 2MB to 4MB. Nodes who are updated to the new software and try to add a 3MB blockchain, will face rejection from older, non-updated nodes who treats it as invalid. Litecoin is an example of a hard fork from the blockchain of Bitcoin and exists separately now.

When it comes to Hard Forks, there are also two sub-types:

  • Planned Hard Fork
  • Controversial Hard Fork

Planned Hard Fork

In a planned hard fork, the community agrees to the upgrade which is usually made clear in advance by the project developers. People voluntarily leave the old version behind. As the migration happen, there will be very few miners left on the old chain and they will probably leave due to lesser incentives.

Controversial Hard Fork

Cryptocurrencies like Bitcoin and Ethereum have very big communities and there are thousands of nodes around the world. Controversial hard forks occur due to disagreements in the community when one group want to introduce certain features or progression which are not accepted by the other groups. Due to the open source nature of cryptocurrencies, individuals and organisations can decide to move to a new blockchain and create their own protocols. Transactions from the original blockchain are then copied into the new fork. The famous examples are Bitcoin Cash and Ethereum Classic.

Soft Fork

Soft Fork is basically a protocol upgrade which is compatible with the older versions, sometimes known as backward-compatible. It still allows the non-updated nodes to add new blocks to the blockchain if they follow the new protocol rules.

For example, if the block size has been reduced from 2 MB to the current limit of 1 MB, non-updated nodes will still be able to see incoming transactions as valid. However, those who attempt to mine new blocks with higher size will be rejected. Soft Fork is usually adopted to encourage the miners to update their software to the new protocol. Some examples of Soft Fork on bitcoin blockchain are Bitcoin Improvement Proposal (BIP) 66 and Pay to Script Hash (P2SH).

Conclusion

Cryptocurrencies have been around for almost 10 years and forks are extremely significant in this ecosystem. Some investors saw tremendous gains* after a fork. However, forks can also be the source of tension when communities disagree on a consensus which resulted in delays or cancellations. Nevertheless, the industry will probably see more updates and new coins via the different forks which is vital for continual growth.

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*Risk Warning

Digital asset trading comes with high risk. ecxx.com only provide users with an online exchange platform and do not provide investment, tax or legal advice. ecxx.com is not responsible for any review of the assets and your trading strategies. There is also no guarantee against losses. Should you choose to trade, you need to be aware of and accept three important considerations: 1. Liquidity 2. Diversification 3. Loss of Capital. Please consult with your financial advisor before trading.

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