What are Hard Forks and Soft Forks

What is a hard fork?

A hard fork, as it relates to blockchain technology, is a radical change to a network's protocol that makes previously invalid blocks and transactions valid, or vice-versa. A hard fork requires all nodes or users to upgrade to the latest version of the protocol software.
Forks may be initiated by developers or members of a crypto community who grow dissatisfied with functionalities offered by existing blockchain implementations. They may also emerge as a way to crowdsource funding for new technology projects or cryptocurrency offerings.

What is a soft fork?

In blockchain technology, a soft fork is a change to the software protocol where only previously valid transaction blocks are made invalid. Because old nodes will recognize the new blocks as valid, a soft fork is backwards-compatible. This kind of fork requires only a majority of the miners to upgrade to enforce the new rules, as opposed to a hard fork that requires all nodes to upgrade and agree on the new version.

Hard forks vs soft forks

Hard forks and soft forks are essentially the same in the sense that when a cryptocurrency platform's existing code is changed, an old version remains on the network while the new version is created.
With a soft fork, only one blockchain will remain valid as users adopt the update. Whereas with a hard fork, both the old and new blockchains exist side by side, which means that the software must be updated to work by the new rules. Both forks create a split, but a hard fork creates two blockchains while a soft fork maintains the original blockchain.
Considering the differences in security between hard and soft forks, almost all users and developers call for a hard fork, even when a soft fork seems like it could do the job. Overhauling the blocks in a blockchain requires a tremendous amount of computing power, but the privacy gained from a hard fork makes more sense than using a soft fork.

Reasons for a hard fork

If hard forks can drastically reduce the security of a blockchain, why do they happen at all? The answer is simple: hard forks are upgrades that are necessary to improve the network as blockchain technology continues to evolve. There are several reasons to introduce a hard fork, including:
  • Adding functionality
  • Correcting security risks
  • Resolving a disagreement within a cryptocurrency’s community
  • Reversing transactions on the blockchain
Hard forks can also happen by accident. Often, these incidents are swiftly resolved and those that were no longer in consensus with the main blockchain fall back and adhere to it after realizing what had happened.
Similarly, hard forks adding functionalities and upgrading the network usually allow those who fall out of consensus to rejoin the main chain.

Notable hard fork examples

There are numerous historical examples of hard forks in the cryptocurrency world, and not all of them happened with the Bitcoin blockchain.
Here are some of the most popular hard forks in history and how they influenced the industry:

SegWit2x and Bitcoin Cash

SegWit2x was a proposed upgrade designed to help Bitcoin scale. It was set to implement Segregated Witness (SegWit) and increase the block size limit from one MB to two MB on the cryptocurrency’s network.
SegWit2x was implemented as a result of the controversial New York Agreement reached on May 23, 2017. The agreement saw that a number of Bitcoin business owners and miners representing over 85% of the network’s hash rate decided the future of BTC behind closed doors.
SegWit would be implemented through a soft fork, while the block size limit would be implemented through a hard fork later on. The proposal was controversial because it did not include any developer behind the main codebase of Bitcoin, Bitcoin Core, and was seen as a centralizing force — a group of businesses deciding the fate of the network without miners and nodes reaching consensus. The agreement arose after years of debate on scaling Bitcoin.
Small block proponents argued that larger blocks would make it harder to host a full node, potentially centralizing the cryptocurrency. Those who supported larger blocks argued that Bitcoin’s rising transaction fees would harm its growth and price some users out of the network.
On Bitcoin’s network, user-activated soft forks are possible. In this scenario, wallet operators, exchanges and other businesses running full nodes can move to a new version of the blockchain that will have an activation point in the future, forcing miners on a network to “fall in line” and activate the new rules. If they don’t, the network could end up splitting.
Bitcoin users campaigned for a user-activated soft fork at the time to stop a precedent from being set in response to the closed-door meeting dictating the future of Bitcoin. They called for implementing the Bitcoin Improvement Proposal (BIP) 148, which sought to implement SegWit on the Bitcoin Network and argued that SegWit2x was a contentious hard fork that made the network vulnerable to a replay attack. It was released in March 2017 and was set to be implemented on August 1, 2017. Fearing that the SegWit2x plan would not be fulfilled and seeing the community support SegWit, some big-block supporters decided to fork the Bitcoin blockchain on August 1, 2017. The result was the creation of Bitcoin Cash (BCH). Its supporters did not see the split as the creation of a rival network, but rather as the continuation of Satoshi Nakamoto’s original vision.
The Bitcoin Cash blockchain was created with an eight MB block size that has since increased to 32 MB. To this day, many Bitcoin Cash supporters maintain that its low transaction fees will help it scale and bank the unbanked, believing BTC will be left behind because of its larger transaction fees.
The Bitcoin Cash hard fork saw the possibility of a hard fork entering the limelight, and shortly after, numerous other Bitcoin forks were created. These include Bitcoin Gold (BTG), Bitcoin Diamond (BTCD) and others.

The DAO Hack

Another major historical hard fork was associated with the decentralized autonomous organization (DAO) that was launched in 2016 on the Ethereum network. Ethereum runs a set of smart contracts, which are essentially chunks of code that automatically execute whenever a set of criteria has been met. These contracts make money programmable and are behind decentralized applications (dApps).
At the time, the DAO raised $150 million worth of ETH in one of the earliest crowdfunding efforts in crypto, before the initial coin offering (ICO) craze of 2017. It was essentially an early iteration of the decentralized governance models DeFi protocols use, wherein token holders vote on the future of the protocol.
After its launch, the DAO was hacked for $60 million worth of ETH from 11,000 investors. At the time, Ethereum was trading below $10, so around 14% of all circulating Ether was invested in the DAO, and the hack was a major blow to confidence in the network.
A debate within the Ethereum community ensued, as everyone scrambled to figure out how to respond to the attack. Initially, Ethereum founder Vitalik Buterin proposed a soft fork that would blacklist the attacker’s address and prevent them from moving the funds.
The attacker, or someone posing as them –– responded to the community claiming the funds had been obtained in a legal way and in accordance to the smart contract’s rules. They claimed they were ready to take legal action against anyone who tried to seize the funds. Tensions rose as the attacker said they would thwart soft fork attempts by bribing ETH miners with the funds.
Debate once again ensued until a hard fork was proposed. The hard fork was ultimately implemented and it rolled back the Ethereum network’s history to before the DAO attack occurred, reallocating the stolen funds to a smart contract where investors could withdraw their funds.
The move was extremely controversial, and in the eyes of some, affected the blockchain’s censorship resistance and immutability: investors were, in their eyes, being bailed out. Those who saw things this way rejected the hard fork and supported an earlier version of the network, now known as Ethereum Classic (ETC).

Hashrate Wars: ABC vs. SV

Bitcoin Cash was created through a hard fork of the Bitcoin blockchain in August 2017, and would later split into two networks as groups within its community feuded. On one side, there was Bitcoin Cash ABC (BCHA), a development team trying to improve the technology behind it. On the other side, there was Bitcoin Cash SV (BSV), a team supported by self-proclaimed “Satoshi Nakamoto” Craig Wright, trying to raise the block size from 32 MB to 128 MB.
At block 556,767, the blockchain split in two, and the battle for the BCH ticker symbol began. Miners on both sides deployed every resource they could to have a hash-rate advantage over the other. Many were calling for a 51% attack on the other network to reorganize its blocks, so its proponents would be forced to move to their side.
Cryptocurrency exchanges and other businesses revealed that they would attribute the BCH ticker to the blockchain that came out on top. Some mining pools diverted all of their resources to the hash wars, with Bitcoin Cash ABC ultimately having the majority of the hash rate and fending off any 51% attack attempts. It later claimed the BCH ticker on exchanges and other services, with the other network choosing BSV as its ticker.