Understanding Hard Forks in Cryptocurrency: What They Are and Their Impact
In the context of cryptocurrencies, the term ‘hard fork’ is highly used, concerning ongoing discussions about blockchain networks and their upgrades. ‘Hard fork’ is another way of describing a major modification of the protocol at the base of a blockchain that makes it different from the previous version and is not compatible with it.
Incompatible changes can result in one blockchain transforming into two different versions with the different rules of these two leading normally to two distinct cryptocurrencies. The analysis of the application of blockchain often involves possessing knowledge of hard forks to examine the development of the technology.
Understanding Hard Forks
A hard fork is a kind of change in the rules of the blockchain that cannot be adopted in the earlier blocks of the blockchain. In other words, the new rules in the new protocol are not sympathetic to the rules that have been replaced. They change the network, and the results coming again from the new protocol are discarded by the nodes that still have old software. A hard fork makes these two unrelated, different blockchains therefore they again refer to it as the creation of two separate blockchains afterward.
Types of Hard Forks
Soft Fork vs. Hard Fork
Soft Fork: It implies a backward-compatible update. The old node can still recognize and validate blocks generated by the new node, although it does not fully use the new features of this new node. A soft fork is less disruptive than a hard fork.
Hard Fork: In contrast, a hard fork is non-backward compatible. It carries changes in the newer version that make it incompatible with the old one which causes the blockchain to be split.
Planned vs. Unplanned Hard Forks
Planned Hard Fork: Sometimes called a “protocol upgrade,” the planned hard forks are scheduled and announced well in advance, implemented mostly for adding new features, improving security, or fixing other issues within the blockchain. For example, Ethereum‘s Constantinople upgrade.
Unplanned Hard Fork: These types of hard forks come out of the blue to all and are usually the direct result of disagreements between the community or developers on which direction the blockchain is headed. Such unplanned hard forks can turn out to be very controversial and might be the consequence of a fight or critical issues that require a solution of immediacy.
Why Hard Forks?
Protocol Upgrades
Feature Enhancements: Hard forks can add new capabilities or features to boost performance, scalability, or security. For example, a feature that came with the Bitcoin upgrade of segregated witness is intended to boost the number of transactions that can be processed and also address some malleability issues about transactions.
Dispute Resolution
Community Disagreements: Several hard forks have happened due to disagreements in a cryptocurrency’s community or among the developers about where a cryptocurrency’s blockchain should go next. If an agreement cannot be made, a hard fork can create a new blockchain and cryptocurrency that continues to implement the changes being advocated for by one side of the disagreement. A prime example of this is the Bitcoin and Bitcoin Cash split in 2017 Security Improvements.
Security Vulnerabilities: Security loopholes in a protocol of the blockchain network can be fixed using a hard fork. This would be necessary to protect the network from future attacks or exploits.
Scalability Solutions
Performance Optimization: With larger blockchain networks in view, scalability will always be a concern. Hard forks can be used to employ strategies to rectify or bolster this capability by increasing block size or even changing the consensus algorithm.
Effects of Hard Forks
Creation of Windfalls
Coin Splits: Hard forks can lead to the creation of new cryptocurrencies. For example, Bitcoin Cash was formed due to a hard fork from Bitcoin. It had its blockchain and a different cryptocurrency.
Market Reactions
Price Volatility: Announcements or implementations of a hard fork can lead to tremendous volatility in the markets. Investors usually react to such changes, thus leading to changes in the prices of both the original and the forked cryptocurrencies.
Network Stability
Community Division: Some of the hard forks introduce controversy to the community and subsequent disputes as well as, network cohesiveness, which is non-compulsory. This brings the stability divides and ultimate sustainability of the blockchain onto the board.
Innovation and Growth
Technological Advancement: Although the consequences are disruptive, the concept of a hard fork, drives the advancement and development of the marketplace in cryptocurrencies. This will allow the general ecosystem to try and adopt new technologies that will be put on the market.
Notable Examples of Hard Forks
Bitcoin and Bitcoin Cash: Conflicts over the scaling of solutions were the main causality of the hard fork in the year 2017 which led to the formation of Bitcoin Cash. Bitcoin Cash is aimed at the extension of block size hence improving the number of transactions per block.
Ethereum and Ethereum Classic: Another great event is the 2016 in Ethereum which resulted from the DAO hack. Ethereum Classic was started then as a chain that would work at the initial Ethereum protocol that the attack occurred right before.
Litecoin and Litecoin Cash: Litecoin Cash was created by the development of the Litecoin hard fork intended to offer many new features and improvements that would in other ways help it distinguish the Litecoin blockchain.
Conclusion
A hard fork in cryptocurrency is a very large change or shift that occurs within the sphere of blockchain. As already discussed, hard forks may be employed for the creation of new cryptocurrencies and the resolution of various issues, and at the same time, they come with their opportunities and threats.
