Hard Fork: Everything to Know
By Beluga Research November 5, 2023
- A hard fork, also known as a hardfork, is a software update that causes a blockchain to separate into two separate chains
- This causes a lasting split between the "before" and "after" versions of the blockchain following the fork
- A cryptocurrency community typically votes to implement a hard fork when members disagree about significant concerns
- The advantages of a hard fork include enhanced security, improved scalability, innovation, community consensus and token distribution
A hard fork, also known as a hardfork, is a software update that causes a blockchain to separate into two separate chains, resulting in a new cryptocurrency with distinct features. A crypto community typically decides to implement a hard fork when members do not agree which path the currency should take.
The group of developers and community members that want to significantly change the direction for the project are usually seeking to modify the rules and features of the token. A hard fork contrasts with a soft fork, which will not split the project into two different cryptocurrencies. A hard fork requires all nodes, or validators, to upgrade. A soft fork does not require any nodes to upgrade.
A Brief History
The first hard forks were implemented in Bitcoin, the first cryptocurrency. In 2010, a bug was discovered in the Bitcoin protocol. The developers addressed it by implementing a hard fork. The incident demonstrated the necessity and effectiveness of hard forks to maintain the integrity and security of a blockchain network.
Since that point, developers in a wide variety of communities have implemented hard forks for cryptocurrencies. Hard forks can be used to upgrade protocol, introduce new features, address security vulnerabilities and resolve conflicts within the community. One notable hard fork is the Bitcoin Cash (BCH) hard fork in 2017. This hard fork was driven by a disagreement over the block size limit.
Fork Hard: Everything to Know
During a hard fork, the blockchain splits into two paths, creating two separate cryptocurrencies. Here are the key aspects:
- Fork Activation: A hard fork is initiated through a predetermined block height or specific date and time. When the activation point is reached, the new rules come into effect. The fork then occurs. Participants need to upgrade their software to continue on the new chain.
- Chain Split: At the moment of a fork, the blockchain splits into two separate chains. The original chain continues based on existing rules. The new chain adopts the updated rules. Each chain has its own miners, nodes, wallets and community members.
- Replay Protection: Replay protection, meaning guards against replay attacks, is crucial to prevent unintended consequences. A replay attack occurs when a malicious actor delays or repeats a transmission of data. Replay protection ensures the smooth operation of the two chains by avoiding transaction confusion. Replay protection mechanisms vary. They usually involve unique transaction signatures or cryptographic techniques.
- Token Distribution: During a hard fork, existing cryptocurrency holders usually receive an equivalent amount of the new cryptocurrency on the new chain. Distribution mechanisms can vary based on fork specifics and developer policies.
- Community Consensus: Hard forks often arise from community disagreements. The success of a hard fork depends on support and adoption from miners, nodes, developers and users. If a significant portion of the community sticks with the original chain, the new fork may struggle to gain traction.
Significant change to the underlying protocol of a blockchain network. This change is not backward-compatible. The term means that nodes running the old version of the software will not recognize or accept blocks created by nodes running the updated software.
New rules. As a result, the blockchain splits into two separate chains. Each chain follows its own set of rules.
Potential for growth. Hard forks can contribute to the expansion and diversity of the crypto ecosystems.
Potential for failure. Both of the resulting chains have the potential to fail. One chain may have a better chance than the other if it has more users and more liquidity.
Splitting of crypto communities. A hard fork results in a permanent split between a once-unified crypto community. Hard forks can fragment communities and advocates of a blockchain or token.
- Creation of a new cryptocurrency. When a hard fork takes place, the new blockchain often introduces its own native token. This token is distinct from the original token. Holders of the original cryptocurrency typically receive an equivalent amount of the new token. They can trade this on exchanges or on the new chain.
- Potential for community division. A division can result in rival factions, each advocating for their preferred version of the blockchain.
- Can be planned or contentious. Planned forks occur when the majority of network participants agree on the upgrade and execute it according to a predetermined schedule. Contentious forks occur when there is a significant disagreement within the community. Multiple factions compete for dominance. Contentious forks can involve debates, power struggles and the creation of multiple competing chains.
- Implications for network security. When a fork occurs, the computing power of the network is divided between the original chain and the new chain. This division can potentially weaken the security of both chains. The available computational resources are spread thinner. Additionally, forks can create opportunities for malicious actors to exploit vulnerabilities or launch attacks. The bad actors take advantage of the confusion and disruption caused by the hard fork. Developers should warn users about security risks following a hard fork.
- Enhanced Security: A hard fork can address security vulnerabilities by introducing new rules and protocols that strengthen network security.
- Improved Scalability: A hard fork can enhance a blockchain network's capacity to handle more transactions per second. It has the potential to improve efficiency and reduce congestion.
- Innovation and Upgrades: Hard forks and soft forks drive innovation and upgrades in a cryptocurrency ecosystem. Developers can introduce new features or improvements through a hard fork. This allows the network to evolve to meet users' needs.
- Community Consensus: A hard fork arises from disagreements within the community. The participants that split off from the previous project may now have a greater say in network development and governance.
- Token Distribution: Existing token holders on the original blockchain may receive an equivalent amount of the new cryptocurrency. This diversifies their holdings so they can benefit from the success of the new project.
- Community Fragmentation: A hard fork divides a community. It has the potential to weaken the crypto ecosystem as a whole.
- Network Congestion: During a hard fork, there is a risk of temporary network congestion. Upgrading the blockchain and migrating users to the new version can strain the network. This results in slower transaction processing times and increased fees.
- Uncertainty and Volatility: Introducing a hard fork can create uncertainty and volatility in the cryptocurrency market. Investors may be unsure about the prospects of the original and new cryptocurrencies. The result can be price fluctuations and market instability.
- Development and Maintenance Costs: Forking a blockchain network requires significant development and maintenance efforts. Resources are needed to implement and support the new version. The change can be costly. Ongoing maintenance and updates are often necessary to maintain compatibility between the two chains.
- Reputation and Trust: A hard fork can impact a cryptocurrency project's reputation and trustworthiness. If the fork is seen as a result of conflicts or lack of consensus, doubts may arise about the project's governance and decision-making processes. This can affect credibility and user adoption.