In this guide, you can find answers to questions such as “What is a hard fork, what does a hard fork do”, etc.
Before answering the question of what is a hard fork, there are some terms you need to know. Let’s start with a brief explanation of each term first.
Blockchain Protocol: Code rules that define connection, mining, and transaction rules. To be part of the network, you must comply with the protocol.
Fork: The moment you have a different protocol version than the main protocol.
Now, let’s start talking about each term in more detail.
The first question we have to answer before we talk about hard fork or other terms: Why do we need to update the protocol?
To fix the significant security risks found in older versions: As cryptocurrencies are a relatively new invention, it has recently begun to replace the regular currency. Paper, ink, font, security layer and more were used to improve the Turkish lira we know today. Now it is very difficult to imitate the Turkish Lira. Likewise, it is necessary to identify and correct security risks for cryptocurrencies.
To add new features: You may be running Windows 10 on your computer today and you will see new updates and important improvements and additions over time. Blockchain code structure is also being upgraded from year to year. Since it is open source, many developers are working around the world. If a developed feature is good enough, we see that this feature is added in the next versions.
To reverse transactions: Remember counterfeit money? Governments can put counterfeiters in jail, but it is extremely difficult to get counterfeit money back from people who buy them. This situation is absolutely terrible. In the cryptocurrency world, it is possible to minimize the damage. When the community learns of any security breaches, it can assume that all transactions that existed on a given date actually did not exist. Have you ever wanted to travel back in time? Yes, it is possible to travel back in time in crypto currencies. Of course, this only applies to bad situations.
What is a Soft Fork?
As we mentioned earlier, a protocol change only provides backward compatibility.
Let’s take traffic rules as an example. Let’s say that the minimum road speed limit in Europe is 60 km per hour and the maximum speed limit is 110 km. What if one day another government sets the minimum speed limit to 65 and the maximum speed limit to 115? Not much will change in terms of the average speed limit. But if you are driving at a speed of 60 km per hour, you will have to accelerate.
Likewise, you do not need to upgrade the blockchain version with Soft Fork right away, and you can continue working exactly as you did before, unless you want to do something against the new protocol.
What is a Hard Fork?
Continuing with the traffic example, Hard Fork is basically the creation of a new parallel phase. After the hard fork, there is no communication or operation option between the previous version and the new, fully split version.
The new version inherits all historical transactions and from now on each version will have its own transaction history.
Hard Fork Examples
Difference from Bitcoin: Higher transaction speed and less independence.
What happened ?: Bitcoin Cash became a new, separate currency after the Hard Fork, and everyone who owned Bitcoin before the Hard Fork added Bitcoin Cash as much as the amount of Bitcoin to their wallet.
When did it happen ?: August 1, 2017
The difference from Ethereum: The DAO is built as a smart contract on the Ethereum Blockchain and is designed to operate like a venture capital fund. Once created, all Ethereum holders were given the amount of DAO for Ethereum.
What happened ?: The DAO was hacked and as a result 3.6 million Ethereum was consumed. To prevent the hacker from bailing, the community voted for the Soft Fork, but soon after, the majority also voted for the Hard Fork.
When did it happen ?: July 20, 2016
Expected Results of a Hard Fork
The result of a particular soft fork or letter fork will usually be:
One blockchain becomes dominant, resulting in the other blockchain having low community adoption and / or value (we use “and” / “or” here because some hard forks like SegWit and Byzantium don’t effectively result in two different tokens, so there is only one difference.)
Both blockchains are adopted, coexist and operate independently of each other, with roughly equal community adoption and / or value (SegWit is like this, as of 2018 many users are still running non-SegWit nodes).
Both blockchains were adopted, but one was preferred. One of the two chains becomes or remains the dominant chain in terms of adoption and value (but the other chain provides reasonable levels of community support and value; Bitcoin Cash and Ethereum are great examples of this).
Any of the above situations can arise with a certain difference, but option 3 is the most common and therefore hard forks creating new cryptocurrencies are the expected result over time.
Again, Bitcoin Cash (a Bitcoin fork) and Ethereum (a fork of what we now call Ethereum Classic) are good examples of the expected result of hard forks aiming to create two assets with market value. Both chains are available, but one is the more popular and usually maintains a higher value. By the way, a soft fork like SegWit usually means second case, and a hard fork like Byzantium is always the first case.
After all, when you understand that a cryptocurrency is a “fork”… make sure you understand what kind of fork it is! However, if you are a miner or usually run your own crypto software, you should stay up to date to make sure you are running the correct version of the software.
Can Investments Be Made Before A Hard Fork?
Hard Fork marks an unstable time for a cryptocurrency. The community will often be divided on one topic and the market is often very volatile, even by cryptocurrency standards. How you react to the situation will depend largely on the stake you have in the currency and the type of fork you’re looking at. In the case of a hard fork where you will get “free” cryptocurrency, it makes sense to keep your currency and even increase your investment. The downside to this is that other major traders do the same. According to some experts, if you’re worried that you won’t be able to react fast enough to sell in front of whales, selling your investment right before the fork can protect against the risk. Of course, these are not investment advice and people must decide for themselves what to do.
If you are examining the soft fork, your choices are a little easier. If you believe the fork will help currency, you can take advantage of price fluctuations. If you believe the fork will be bad for the currency, you should sell it before it crashes. Remember, if the community is not behind the fork, there is still a possibility that the currency will split.