Hard Forks in Cryptocurrency
Hard Forks in Bitcoin, Ethereum, and Other Cryptocurrencies
In simple terms: A hard fork is when a single cryptocurrency splits in two. It occurs when a cryptocurrency’s existing code is changed, resulting in both an old and new version. Meanwhile a soft fork is essentially the same thing, but the idea is that only one blockchain (and thus one coin) will remain valid. So both forks create a split, but a hard fork is meant to create two blockchain/coins and a soft fork is meant to result in one. Segwit was a soft fork, Bitcoin Cash, Bitcoin Gold, and Segwit2x are all hard forks.
The result is generally for either type of fork (to use the words of Coinbase when discussing a User Activated Soft Fork):
- One blockchain becomes dominant, resulting in the other blockchain having low community adoption and value.
- Both blockchains are adopted, co-existing and operating independently of one another with roughly equal community adoption and value.
In general the 1st one tends to happen for both hard and soft forks.
In more technical terms: A hard fork is a term that describes a major change to blockchain protocol which make previously invalid blocks/transactions valid (or vice-versa). This can be used to keep the same coin with major changes to the blockchain, or to create a new coin. This requires all nodes (all computers that connect to the cryptocurrency’s network) to upgrade to the latest version of the protocol software if they want to use the new coin or blockchain (or to maintain the existing protocol if they want to use the old coin or blockchain).
The end result of a coin “forking off” to form its own blockchain and/or currency is that there are two of everything. Two different coins, with two different ledgers (from X block forward), with two different sets of code, both originating from the same platform and blockchain. In cases like Segwit, everyone ideally updates to the new software and uses the updated blockchain. In cases like Bitcoin Cash, two different coins and blockchains-from-x-block-forward run starting at a given block.
TIP: Segwit, Segwit2x, Bitcoin Cash, and Bitcoin Gold are all different hard forks in Bitcoin that happened or are happening in 2017. The Segwits change the blockchain but keep the Bitcoin name (although there is some conflict over how this will work with Segwit2x). Meanwhile, Cash created new coins (and Gold is projected to do the same). See a Segwit explainer.
TIP: For a visual of a hard fork, see Investopedia’s Hard Fork page.
TIP: When a cryptocurrency forks, you want to be holding that cryptocurrency in a digital wallet and not an exchange (so Coinbase, a third party wallet, etc but not active on an exchange). The reason for this is because, essentially, you get X amount of the new coin for holding the old coin when the fork happens (and this can only happen if you are holding your coins in a wallet or on an exchange that allows for it). For an example and explanation, see: What the Bitcoin Cash fork means for Bitcoin holders. Also, see: Bitcoin Fork FAQ and Update on Bitcoin Cash which explained this for the last Bitcoin fork in respect to Coinbase. See Bitcoin Gold for that (this one, like SegWit2x has a lot to consider).
How are Hard Forks Created?
Generally, creating a fork require majority support (AKA consensus) from coin holders connected to the coin’s network. See: Consensus rules on Bitcoin.org for more details.
Thus, a single cryptocurrency with a single blockchain (like Bitcoin) experiences a “hard fork” when enough people holding the cryptocurrency agree to create a new cryptocurrency with its own blockchain on-top of the existing system starting at certain block.
This is how Bitcoin Cash was created for example, this is also how the current version of Ethereum’ Ether was created.
A fork like this can occur for any reason, either to innovate (as is the case with Bitcoin Cash) or to repair damage done by a hack (as is the case with Ether).
FACT: Not every fork will result in owners of a cryptocurrency getting “free coins,” however when a legit hard fork occurs that creates a new cryptocurrency, this is the case. For example, Bitcoin holders received one “free” BCH (Bitcoin Cash) for each BTC (Bitcoin) they owned. That is obviously an absurdly good deal (although one risks the original asset’s price dropping in “split” events like this).
TIP: Read about The Birth of BCH: The First Crazy Days of “Bitcoin Cash” or Ethereum’s Byzantium Hard Fork to get a better idea of the different types of hard forks and their implications.
TIP: There are other types of forks as well (forks in general, soft forks as noted above, software forks, git forks, [insert Bubba Gump reference]). Any divergence in the blockchain is a fork, the qualifying terms describe the details of the divergence (in terms of both code and the intent behind the fork).