The Beginner’s Guide to Understanding Cryptocurrency Hard Forks and Soft Forks
If you’re just getting into cryptocurrencies, chances are that many of the terms are confusing to you. If you’re thinking you’re alone in this, don’t. Thousands of other folks are at this very moment, confounded by the same terms as you are.
While the various terms are numerous and can be explained in a single sentence, there are some that require a bit more than that to facilitate comprehension among beginners. The terms Hard Fork and Soft Fork are two of those terms. Let’s start with Hard Forks.
So, What are Hard Forks?
Simply put, hard forks are deviations from a cryptocurrency blockchain that then go on to become self-sufficient and self-sustaining. They are often meant to help improve all or some parts of a blockchain protocol, and solve some, if not all of its problems.
These variants are often considered newer protocols and may either be backwards compatible or not –this means their platform or protocol can also be done on the old platform.
To make this relatable, a good example of this in the real world is Henry Ford’s original black A Model vehicles and the new models you have now, with the A model compared to the old blockchain and the newer models equated to the newer forks.
Of course, in the same manner that some Ford models have gone on to become successful and others less so –here’s looking at you Edsel- hard forks can also be either successful or not.
Hard forks are often necessitated by a need and the willingness of a community to carry out significant changes to a protocol. This can happen because of a serious problem or when the community is confused about how to proceed.
The most common instances of blockchain hard forks include bitcoin cash and bitcoin gold which are hard forks of bitcoin, and ethereum classic which is a hard fork of ethereum. To carry out a hard fork often requires the “splitting of the chain”, with one continuing with the status quo, and the other moving in another direction.
A good example of a successful hard fork is the bitcoin cash hard fork event. In 2017, the bitcoin community reached a roadblock about how to proceed with the blockchain protocol.
On the one hard were those who wanted to continue “managing” the protocol with its incessant and unrelenting problems. On the other hand were those who wanted to improve on how transactions were handled and do away with the old “archaic” protocol.
When both groups couldn’t reach a consensus on how to move forward, the latter, more progressive group decided to split the blockchain –the hard fork, and start a protocol that they envisioned.
As a result, bitcoin cash was born, with its path and protocols. However, because it shares the same protocol history as bitcoin, it means you can process bitcoin transactions on the bitcoin cash platform, but cannot process bitcoin cash transactions on the bitcoin platform. The protocols and blockchains are different.
However, this isn’t the only time that a hard fork was created from the bitcoin protocol. Other hard forks have been tried without much success. The only prominent bitcoin hard fork success so far, is the bitcoin cash fork.
How Do Hard Forks Function?
The first thing you should know is that all blockchain projects have their various rules. What works for blockchain A may not work for B.
These established rules –also called algorithms- determine how each blockchain would function. It’s responsible for the block size, miners’ tasks and rewards, transaction fees, transaction duration and so much more.
But, once the community starts thinking of a significant improvement to a part of the protocol –for instance, increase in block size- they’ll put it forward to the protocol’s management team and the community at large.
Once those changes have been approved, the choice often becomes whether to alter the main blockchain –not possible, app extra layers or build a new network/protocol around the main one, or start a new protocol using the main protocol as a foundation of sorts. Most of the time, the resulting consensus is to go with the third option.
How well these suggestions and options are received will often determine how successful the new fork will be. For it to be successful, you’ll need an active, sizable community that’s devoted to the blockchain.
One where the majority or everyone likes the proposed changes and are in support of the fork, are involved in the implementation of the changes and eventually migrate to the new fork is called a successful hard fork.
Those where the community is divided on the new suggestions, resulting in a group splintering off and creating theirs, are known as contentious or experimental hard forks. A failed hard fork is one where too few or no members of the community back, support and move over to the new fork.
Hard forks are often used to remedy severe problems found on the parent blockchain, add new functions, and increase the blockchain’s security standards.
Hard Forks Can Be Financially Rewarding
One of the often unstated benefits of hard forks is the opportunity for participants to earn free crypto tokens. In many instances, transactions carried out on the old or parent blockchain are duplicated on the new chain.
During the bitcoin cash hard fork incident for instance, all bitcoin holders who moved, also got free bitcoin cash tokens equal to what they already had. So, if you had 1,000 BTC before the hard fork and then moved to the new protocol, you got 1,000 BCH too, whilst still retaining your current bitcoins.
Naturally, these free tokens typically come with certain terms and conditions. As far as we’re concerned though, the free tokens you get are worth the wait and adherence to the rules.
Aren’t They an Unnecessary Risk Though?
There are many users who are often wary of hard forks, and for good reason too. These folks tend to antagonize forks because they feel that it will negatively impact the current value of the blockchain.
And this is usually true… for the most part, unless you have a successful hard fork. In this instance, it can actually increase the value of the parent fork. In fact, most investors often rush to buy the parent fork in the hopes that they’ll enjoy free crypto tokens from the new forks –this is often called an airdrop.
If the fork is successful, traders and investors can often trade those free tokens for a tidy profit as it’s essentially “free money”.
While bitcoin cash is the most popular successful bitcoin hard fork, it is interesting to note that there were others that fizzled out as quickly as they were created. These include Bitcoin Platinum (BTP), Bitcoin God (GOD), Bitcoin Cash Plus (BCP), Super Bitcoin (SBTC) and Bitcoin Uranium (BUM).
Other less popular but still working hard forks include Bitcoin Gold (BTG), Bitcoin Diamond (BCD), and Bitcoin Core (BTX) to mention a few.
Now that you already know a lot about hard forks, how about we move on to soft forks.
What Are Soft Forks?
Soft forks, whilst still an alteration or modification of the blockchain protocol, is still compatible with the parent protocol. For instance, think of it in terms of the Microsoft office software. All newer editions of the Microsoft Office can run the older versions. They are compatible with the older version, even if the updates in the newer edition don’t reflect in the old one.
Therefore, soft forks are said to be backwards compatible –new blockchain protocols can work with parent protocols- because the parent blockchain is essentially the same. These aren’t the same as hard forks that have essentially veered off into another direction or path.
These are the same, but with extras, additions, improvements and upgrades. They are like web 1.0 (primarily text based), and web 2.0 (images, videos and apps all functioning alongside the text). The latter is an improved version of the former. No new blockchains are created in soft forks.
Because a new blockchain isn’t necessary, there’s often no need for a majority vote to implement the soft forks. This makes it incredibly easy for developers to do it all the time as all they need is adoption by a significant number of miners, nodes or participants.
The ability to differentiate between a hard and soft fork can either save or make you a lot of money. As much as possible, pay attention to hard forks and the rumors surrounding them.
If the proposed changes are justified and there’s a solid chance of the fork surviving and thriving on its own, you should get in on such opportunities. But, if you have serious doubts, wait it out.
This way, you don’t end up investing in a dud project that will never see the light of day. We hope you now understand the difference between these two terms and can easily identify both of them whenever the situation demands. Good luck in your investing and trading.