A hard fork and soft fork are two different ways to make changes to a blockchain. A hard fork involves major changes and is not compatible with the older blockchain. A soft fork is a more subtle modification that remains compatible with older software and can be used, for example, to improve security or add new features.
✔️ A fork is a splitting of roads
✔️ A hard fork makes two different roads that are not backwards compatible
✔️ A soft fork is a minor modification of the road
✔️ Forks are necessary because of advancing technology and insights
In computing, a fork is perfectly normal. When you update your cell phone, there is a fork. You have mobiles that have installed the update and there will always be those that have not. Yet those continue to work as normal.
Even on computers and for all kinds of software programs, you get updates. The old software is then forked into two different versions, where the new version can make use of new features and the old, not forked, works on in the same way as before the update.
These are soft forks. With a hard fork in a program, you get a completely new program that cannot work with the old network. For example, a program version 1.1 is a soft fork. Program 2.0 can be called a hard fork, for example, Windows 95 to Windows 98.
You know forks, one of those four-tooth shapes. There are also three-tooth forks, for when you can't afford four-tooth forks. For the elite, there are also five-tooth forks, but the four-tooth fork is common.
A fork occurs when a new rule is invented that deviates from a blockchain's existing protocol.
You can think of a fork as a road that splits. The normal path on a blockchain is straight ahead. With a hard fork, a left or right turn is made and then it goes straight again in the new direction. The original blockchain, however, just keeps going straight ahead. In this process, two blockchains are created.
With a soft fork, you go rightish or leftish, which means you are still going straight on the same blockchain, but that an update causes you to deviate slightly from the normal route. There is still only one blockchain then. The majority decides which branch of the split is taken. It is even possible to have multiple protocols on one blockchain and still belong to the same blockchain, as with Bitcoin with and without SegWit.
A cryptocurrency works with a blockchain protocol, which contains the rules of this blockchain. Any deviation from this is called a fork.
Once a new course is proposed, miners or validators will have to consider it. The majority decides what a blockchain will look like using a consensus protocol. If most validators accept the new course, this new path will become the main blockchain via a soft fork. The old version will still work, but little by little all validators will download the new update and the old version will disappear from sight.
That may be true, but if there are many opponents of a proposal, a split in the community may occur, as miners do not accept or download an update or course change, for example. In that case, a hard fork may occur, where a new cryptocurrency with its own blockchain is created via a hard fork.
Many blockchains today have open source protocols. A good example of this is Bitcoin. This means that tomorrow you can launch a coin almost identical to Bitcoin simply by duplicating the code. They then say you are forking Bitcoin's code.
Our expectation is that your coin will then be worth just a bit less than Bitcoin for the time being. You will also have to make some adjustments, otherwise you might as well join the Bitcoin network. This is a lot of work though, just so you know.
Yet it is perfectly legal and is therefore quite widely used. Litecoin, for example, is based on the code of Bitcoin, as is Bitcoin Cash.
Stranger it gets when you say Ethereum is based on the source code of Ethereum Classic. Wait a minute, shouldn't that be the other way around? No, Ethereum is a hard fork of the original, namely Ethereum Classic.
It's a piece of cake to copy a coin's code, but getting enough people interested is just that little more difficult. For example, people have to validate your new coin, use it and it has to be for sale somewhere. So, that's why there are "only" 10,000 coins, otherwise there might be billions.
We will go into a little more detail about the hard fork so that you have a good understanding of exactly what it entails.
The hard fork is the best known, because it usually ends with a lot of trammel. There are quite a few well-known hard forks, such as Bitcoin Cash and Ethereum, that were accompanied by a schism in the community.
In a hard fork, a copy of the old network is made on the blockchain and the old network continues as normal, but the new network splits off on the blockchain, after which each owner of the private keys of that blockchain network gets a specified amount of new coins from the new network. per coin he had from the old network.
A hard fork is a significant change to a blockchain's protocol that is not compatible with the old software. This means that if you are working with the old software you can't even see the new blocks. However, you can still see the blocks created with the old software. So then two blockchains exist. Usually the changes are quite radical, so one group agrees and the other does not.
An example is Bitcoin's protocol, which gave a maximum size to a block of 1 MB. When an update also allowed larger blocks, miners who did not have this update installed suddenly could not see these blocks. According to protocol, these blocks were therefore impossible. So there were only two options: all download that upgrade or a hard fork. The latter followed and Bitcoin Cash was born via a Bitcoin hard fork with larger blocksizes. Bitcoin continued through SegWit and the Lightning Network to address scalability. This battle was so fierce that it was even given a name: "The Blocksize Wars."
If there is no predetermined consensus among validators on a more or less radical change to a blockchain's protocol, one always risks a hard fork.
As soon as it becomes clear that a hard fork is going to take place you will have to be wary of trading in such a coin until the hard fork is complete. It may well be that you trade in your coins via a transaction with new rules and that those rules will belong to a completely new blockchain, from which that particular coin will be worth much less. In a schism, 1 of the 2 blockchains always wins, namely the longest one. In such a case, it is better to wait until the fork is complete.
If a community disagrees with an update to the protocol or the path taken, a new cryptocurrency on a new blockchain can emerge.
Sometimes developers come up with a drastic update to a protocol that necessitates a hard fork. For example, Ethereum's Paris hard fork was mandatory because it switched from Proof of Work to Proof of Stake. Old software then no longer worked on an Ethereum node or validator.
When you use the open source code of a cryptocurrency to create a completely new coin, it is called a hard fork. Fortunately, no roadblocks need to be put in place because this way you have nothing to do with the old blockchain network.
Backwards fork. This is a very unusual hard fork, where certain blocks in the chain are invalidated. This goes completely against the immutability of a blockchain that, to my knowledge, has only occurred once. It was even at the birth of Ethereum! The DAO, the first DAO, lost out in the process. All blocks that used an error in a particular smart contract were declared invalid and Ethereum was going to reverse their transactions. Ethereum was the coin that separated from Ethereum Classic via this hard fork. The community of Ethereum Classic could not just give up the immutability of a blockchain for a few thieves!
Normally, you get free coins after the hard fork is implemented. You keep the coins of the forked coin and get a certain amount of coins of the newly formed cryptocurrency per coin.
There are some things to consider, though.
If the new currency has just hit the market and you trade with it, you can face a replay attack (or also called repeat attack). With soccer you can watch that fancy attack again, but with a new cryptocurrency your transaction data from your trade can be transferred to the old network by hackers.
Hackers use your credentials, which they have previously picked up, to pretend to be you and thus allowed to act.
Then these hackers can use this to extract crypto from your wallet. Miners only see the transaction, so they can't catch these guys double spending or anything like that. So they can rob you.
You can avoid this by waiting a while. After a week or so something is usually done about this problem by replay protection, which can be implemented in many ways by programmers in the background. You should check this on their website or look it up on a search engine.
Also, it depends on your situation. Let's get things straight:
Your coins are on an exchange. The private keys in this case are owned by this exchange, so they actually get the new coins. Usually especially the big exchanges are very flexible about this and give traders their rightful share for the coins they had at the time of the fork. This is good for their reputation and it costs them nothing. Moreover, it generates more trade. Check this beforehand.
Your coins are on a hardware wallet. In that case, you own the private keys and are entitled to the extra coin(s) per coin you have at the time of the fork. Do pay close attention to how to get these coins because there may be snags in a fork, where your coins are offline and thus invisible to the forked network.
Your coins are on a software wallet, decentralized exchange or god knows where. In that case, you'll have to pay extra attention to how the place that holds your coins handles them. If you can't figure it out or it's all a bit fuzzy, then it's not a bad idea to put these coins on a hardware wallet or an accommodating exchange for a while so that you receive those extra coins as well.
Sometimes you can get the grand prize, although that's probably a lot rarer these days. When Bitcoin Cash made the hard fork in 2017, you got an equal amount of Bitcoin Cash for every BTC you had, because there will be as many BCH as BTC. At that time, you got $555 for 1 BCH, while BTC was worth around $2,500. Quite a hefty amount, in other words. BCH did then slump to around 250, but made a huge run to over 3K in 2018. Nice cashing in then!
There is also a soft fork, in which case no new coin is created but only the coin's protocol changes.
A soft fork involves changing the rules contained in a blockchain's protocol, after which two versions of the same network exist on the same blockchain.
Usually, the majority of users of a network, such as miners and validators, update their software, creating a fairly level playing field. A soft fork is backwards compatible, meaning that both the new and old versions are compatible with each other.
Still, there have been soft forks that have caused quite a stir. For example, Bitcoin's SegWit upgrade is a soft fork that initially generated a lot of resistance, especially from Chinese miners. After many fives and sixes, the Bitcoin network went ahead with two software versions of the same protocol, but eventually the hard fork followed of Bitcoin Cash in 2017.
Soft forks are often implemented to fix problems or make things run smoother. For example, to make a network faster or change the cryptographic algorithm, you're not going to create a new coin anytime soon, you can do that with a soft fork.
Bugs are also fixed this way. The old version of the network then still works fine, but as time marches on most users tack on and download the latest version.
Very occasionally there is also a temporary, unplanned soft fork that is soon resolved. In a Proof of Work network, sometimes two miners at the same time find the outcome of the cryptographic puzzle and pass that on to the miners. This is resolved a bit blandly for the loser, but in a blockchain the principle applies that the right blockchain chain is the longest one. Once one outcome is accepted by a miner, the other solution is part of the shortest chain and is then rejected.
A cryptocurrency begins its "career" as a product that is not yet finished. You can compare it to building a house. At some point you think: ah yes, a light switch still needs to be mounted in the basement. And there should be blinds, and so on. For every adjustment to the blockchain and the protocol, you need a soft fork.
Sometimes users become dissatisfied with certain features on a network. Once the group is large enough, something will have to be done. Usually a soft fork follows with a marginal solution, but sometimes the contradictions are so great that it's pretty much 50/50. In that case, there may be a hard fork.
Keeping a blockchain network secure involves quite a few drops of sweat from programmers' heads. Many a hack has given them premature gray hair. As soon as there has been another hack, these poor folks have to start putting together a soft fork to rebuild the blockchain with a new layer of protection.
Sometimes a fork goes so far as to fork the blockchain back to an older state and continue at a point when an undesirable thing (such as a hack) has not yet happened. Such a thing is in stark contrast to the idea of the immutable blockchain, but some developers stop at nothing except for an old woman crossing over.
Bitcoin Cash is a hard fork of Bitcoin, after SegWit was introduced. Bitcoin Diamond was also a hard fork of Bitcoin.
Ethereum is a hard fork of Ethereum Classic, in response to the hack of The DAO, which reversed the blockchain to a date before that hack.
These are examples that usually occur after a schism in the community of a blockchain network.
There may also be a hard fork that does not yield two coins, but is mandatory. Here you have to think of drastic changes, such as the Paris hard fork on Ethereum, after which they switched from Proof of Work to Proof of Stake. Then, of course, the old network and the software associated with it is no longer valid and all validators and nodes have to upgrade their software.
Monero and Cardano are also making themselves heard more frequently in terms of mandatory hard forks.
With a soft fork, both the old and new versions can be used; with a hard fork, they cannot.
A hard fork is usually introduced after heated debates, a soft fork is usually silent.
A hard fork is usually very invasive, while with a soft fork it is common to be a minor adjustment.
A hard fork creates a new coin; a soft fork does not.
With a hard fork you can get free coins, with a soft fork you cannot.
A hard fork requires you to run mandatory new software to keep up with the blockchain network, a soft fork does not.
Forks are here to stay.
Fortunately, because eating meat with a spoon is less pleasant.
There will always be updates to all kinds of blockchains, because the world and techniques are always changing and therefore the protocols need to be updated.
There will always be cleavages in all kinds of communities, creating new cryptocurrencies.
Perhaps the arrival of a governance token in many blockchain networks can avoid a lot of hard forks, but soft forks are here to stay. Fortunately, because who wants to work with a program "from the last century," so to speak.