Hard forks can help to close security holes in protocols, add new features or improve functionality, and change mining rewards or transaction fees, as well as the speed and scale at which transactions on a blockchain are validated.
But what exactly is a cryptocurrency hard fork? Please scroll down for more information, including how it works and some significant milestones of Hard Forks in Cryptocurrencies.
What Is Hard Fork?
A hard fork is a new software update implemented by the network nodes of a blockchain or cryptocurrency incompatible with the existing blockchain protocol, resulting in a permanent split into two separate networks that run in parallel. Creating a new cryptocurrency with the same structure but different features and functions.
Hard forks, as opposed to soft forks, which are essentially backward-compatible updates, establish a permanent change in the rules of a blockchain protocol, with each version propagating its own transactions and blocks.
How Hard Fork Works
A blockchain fork can occur on any crypto-technology platform. That’s because blockchains and cryptocurrency operate in essentially the same way regardless of which crypto platform they’re on. Blockchain blocks can be thought of as cryptographic keys that move memory. Miners On a Blockchain understand the new rules because they set the rules that move memory in the network.
However, all miners must agree on the new rules as well as what constitutes a valid block in the chain. So, if you want to change those rules, you must “fork it” to indicate that there has been a change or deviation from the protocol. The developers can then update all of the software to reflect this new information.
Various digital currencies with names similar to bitcoin have emerged as a result of this forking process, including bitcoin cash, bitcoin gold, and others. It can be difficult for the average cryptocurrency investor to tell the difference between these cryptocurrencies and to map the various forks onto a timeline.
3 Reasons for a Hard Fork
To fix important security risks found in older versions
To add new functionality
To reverse transactions
Hard Fork vs Soft Fork
A hard fork is a permanent update to the network’s code that breaks compatibility with older nodes. When the hard fork occurred, the blockchain was really divided into two parts: the original blockchain (which has its own set of rules) and a new blockchain (which has a new set of rules).
Softfork is a minor upgrade of Blockchain that adds new features and functionality. As a consequence, the changes will be backward compatible inside a single blockchain, and prior blocks that did not make a fork would still be recognized.
Pros & Cons of a Hard Fork
- Enhancement of network connectivity with the faster transaction process
- Creation of a new digital asset to the network and provided as an airdrop for users from the Hardfork
- For example, if a Hardfork is happening to ETH, a user holding 1 ETH will get 0.1 ETH once the hard fork is completed. These new assets can then be traded or held hoping the price will rise.
- Hardfork often affects the market value of the existing asset, bringing high volatility to the currency.
Milestones of Hard Forks in Cryptocurrencies
Ethereum London Hard Fork
On August 5, 2021, Ethereum released its major upgraded ‘London Hard Fork’ to change the way transaction fees are calculated. The hard fork includes Ethereum Improvement Proposals (EIP), which will burn a portion of the gas fee from circulation. Furthermore, every node in the Ethereum network must follow a set of rules when mining and making transactions in order to improve the overall system.
Bitcoin Cash Hard Fork
The first Bitcoin hard fork occurred in August 2017 as a result of network congestion caused by the 1 MB explicit block size limit. This fork increases the block size to 8 MB and introduces ‘Bitcoin Cash,’ which promises additional data storage outside the blockchain as well as a faster transaction process through the use of Delta Blocks with Proof of Work (POW).
Terra Hard Fork (Under Development)
On May 11, 2022, the price of LUNA coins plummeted after the stablecoin UST lost its peg to the USD and fell below US$ 1, destroying many investors. Do Kwon, the creator of LUNA has now advocated for a hard fork of Terra’s ecosystem in order to regain the trust of investors and Terra users.
Given the security differences between hard and soft forks, almost all users and developers advocate for a hard fork, even when a soft fork appears to be adequate. Overhauling the blocks in a blockchain requires a massive amount of computing power, but the privacy gained from a hard fork is preferable to a soft fork.