The Road Not Taken is a famous poem by Robert Frost that speaks of two roads diverging in a yellow wood. Indeed, in most of our lives there have been instances of the proverbial ‘fork in the road’, and the life of a crypto currency is no different. But what does it mean if a cryptocurrency goes through a fork? What’s the difference between a hard and soft fork? And why do they occur in the first place? Read on.
The Forking of the Chain
The history of a currency’s transactions is stored in its blockchain, a series of data blocks that builds upon itself, storing all information relating to the trading of the currency. The blockchain is accounted by the sum total of mining nodes involved in the cryptocurrency. Occasionally, there will be a need to alter the rules under which the currency’s blockchain operates, which will take the form of a software or protocol update. This will result in an interruption of the blockchain.
In many cases, the developers of the currency will feel the need to improve the currency’s functionality by updating the blockchain protocol, in order to achieve such things as strengthening privacy or allowing the accommodation of a higher volume of trading (known as scalability). In order to accomplish this, all nodes wishing to continue mining the currency and adding to the blockchain will be required to install the update. Although this requires some legwork, it will often be seen as a non-controversial, or even routine event.
In other cases, members of a currency’s community will disagree on some aspect of its functionality, creating a stalemate. As a result, a group from within the community will adopt and install a new set of rules, while others will insist upon remaining with the original protocol. This can be a fractious and contentious event, resulting in two divergent blockchains, two versions of the truth, and ultimately, two competing currencies. Essentially, a blockchain that had been one straight line will now fork into two distinct blockchains.
Soft Forks and Hard Forks
Soft forks are backwards compatible, meaning they don’t require a universal update of nodes and software. They require only that a majority of nodes are upgraded in order for the new chain to become the dominant chain, or chain of record. Those who don’t update will still have compatibility, although they will lack functionality, and be unable to mine on the new blockchain. Everybody will still be trading the same coin.
Hard forks are not backwards compatible. For those who adopt the new code, the old rules will become obsolete. There will forever be two versions of the blockchain, and those from the original community will choose to follow one chain or the other.
Bel Air and Batmen
Consider the classic sitcom ‘The Fresh Prince of Bel Air’. As the show gained popularity in its early seasons, the set was updated, giving the gang a new kitchen in which to gather. Eventually a new actress was brought in to play Aunt Viv. As viewers, we adapted to the changes. All the experiences the Banks family went through before and after were considered to still be relevant. A soft fork.
Alternately, comic book heroes like Batman often branch off into different realities. The experiences of the caped crusader in a new line of comic books will not impact the version of events depicted by the Hollywood franchise, and vice versa. They are essentially two separate Batmen. A hard fork.
The Road Less Travelled
It is worth noting that anyone, at any time, who possesses the technical know-how, can create a new version of a currency’s blockchain, effectively creating a fork. The difficult part, of course, is to persuade a significant portion of the community to install the upgrade. Without proper buy-in from the community, the new path will quickly be lost to history. Unlike Robert Frost’s poem, taking the road less travelled is not necessarily a good thing.
Some More Concrete Examples
A group of people from within the Bitcoin community sought to increase the currency’s block size, a development aimed to increase scalability and make Bitcoin a more functional transactional currency. When met with resistance from the rest of the community, the group created a fork, leading to the creation of ‘Bitcoin Cash’, on Aug 1, 2017, which continues to operate as a separate entity from the original Bitcoin blockchain.
Ethereum experienced a hack in 2016 in which over $50M worth of the currency was stolen. Although the currency’s developers decided to roll back the blockchain in order to eliminate the hack, a group from within the community opposed this on philosophical grounds, holding that the integrity of the original blockchain overrides all other concerns. The smaller group withheld, and as a result Ethereum Classic forked from Ethereum.