As blockchain and cryptocurrencies gain prominence, the issue of forking is also gaining momentum as developers improve their networks for efficiency. A blockchain fork can simply be defined as a collectively agreed upon software update. There are two types of forks; hard and soft.
A hard fork occurs 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. Put differently, a hard fork is a permanent divergence from the previous version of the blockchain, and nodes running previous versions are no longer accepted by the newest version. This essentially means that one path follows the new and upgraded blockchain, while the other path continues along the old path. Generally, after a short period of time, those on the old chain will realize that their version of the blockchain is outdated or irrelevant and quickly upgrade to the latest version.
Hard forks typically change consensus rules (i.e. block size, mining algorithm, consensus protocol) in a way that makes previous versions of the software incompatible. A good example of a hard fork is the upgrading of the Bitcoin blockchain which resulted in the creation of Bitcoin Cash while the original Bitcoin remained intact.
Why is a Hard Fork Important?
There are generally three reasons why a hard fork is important in the blockchain industry:
To fix important security risks found in older versions
A hard fork can be implemented to correct important security risks found in older versions of the software.
Cryptocurrencies are relatively new in the market and just like the fiat currencies underwent numerous changes and security layers to make make it hard to fake them, the cryptos are also in that stage. It will take some time to find all the cryptocurrency security risks and fix them.
To add new functionality
The Blockchain code is also upgraded from year to year. Since it is an open source development, developers work on it worldwide and propose their improvements to the community. If a feature is good enough, it will be added to the next version.
To reverse transactions
In the crypto world, once a community finds out they have a security breach, they can proclaim all the transactions made from a specified date as not existing. Like, never happened. This was the case with the hard fork to reverse the hack on the DAO (decentralized autonomous organization) in the Ethereum blockchain. Following the hack on the DAO, the Ethereum community almost unanimously voted in favor of a hard fork in order to roll back transactions that siphoned off tens of millions of dollars worth of digital currency by an anonymous hacker. The hard fork also allowed DAO token holders to get their ether funds returned to them.
The proposal did not exactly unwind the network’s transaction history. Rather, it relocated the funds tied to The DAO to a newly created smart contract with the single purpose of letting the original owners withdraw them.
Difference between hard and soft forks
Hard forks and soft forks are essentially the same things in that when a cryptocurrency’s existing code is changed, an old version remains while a new version is created. However, with a soft fork, only one blockchain will remain valid as users adopt the update. Both forks create a split, but a hard fork creates two blockchains, and a soft fork is meant to result in one.
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