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What Is a Hard Fork in the Crypto Economy?

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What Is a Hard Fork in the Crypto Economy?

Hard forks have become a major topic in the cryptocurrency space in the past six to twelve months. After Bitcoin Cash (BCH) forked from the Bitcoin blockchain in August 2017, a wave of bitcoin forks hit the community and with it came substantial controversy surrounding the legitimacy of these forks.

The Types of Forks

In simple terms, a hard fork is a software upgrade in a cryptocurrency network with which all nodes need to agree. Should the hard fork be contentious, i.e., not all miners conform to the new rules set in place for the network, a chain split can occur, resulting in both the legacy blockchain as well as the upgraded blockchain functioning alongside one another as some miners continue to mine the “old” chain. This, for example, was the case with Ethereum (ETH) and Ethereum Classic (ETC) in 2016.

While hard forks have gained infamy in recent months, it is important to note that forks actually happen quite often in blockchain networks. They are a byproduct of the consensus mechanism employed to keep a particular ledger functioning.

Outside of the aforementioned hard fork, there exists also a soft fork.

Soft forks are upgrades to the software that are usually introduced by developers to improve the network in some way. The main difference between these and hard forks is that soft forks offer backward compatibility. That means that nodes that do not want to upgrade their software are still able to participate within the network, albeit with some disadvantages.

While both varieties of fork are introduced in the same way, the changes a hard fork induces result in an entirely new chain with its own distinct set of rules and protocol. It is important to note that the new ledger will contain all the historical transactions included in its parent chain up until the point of the split.

Soft Fork vs Hard Fork Crypto

(Source: Investopedia)

Hard forks have become a polarizing topic within the cryptocurrency community. Historically, there have been some high-profile hard forks that have had a large number of supporters as well as opponents. To understand the controversy behind these events, it is essential to first be aware of the reasons that may lead to a hard fork.

Why Do Hard Forks Happen?

Firstly, a hard fork may occur as a result of a developer and community decision to upgrade the network. This decision is usually a planned event and does not feature any contention due to its prearranged nature. This type of hard fork is undertaken to introduce features that will enhance a cryptocurrency project. However, because all participants within the network agree, it does not result in the formation of a new cryptocurrency.

For instance, the privacy-centric digital currency Monero (XMR) instituted a hard fork in January 2017 to be able to support Ring Confidential Transactions. This is a feature that enables greater security and privacy within the Monero network. Another example is the byzantine upgrade integrated into the Ethereum network in October 2017. The update was part of the network’s plan to support private transactions as well as address scalability concerns.

Secondly, hard forks can happen as a result of disagreement within a cryptocurrency community. Some members may seek to institute changes in the protocol of a coin or token while others do not. If the community is unable to come to a compromise and subsequent agreement, then there is likely to be a hard fork followed by a chain split. This results in the formation of an entirely new blockchain with a new native cryptocurrency.

An excellent example of this is the creation of BCH. The proponents of this fork wanted to increase the block size in the Bitcoin network from 1MB to 8MB. They believed this would help address the scalability issues facing bitcoin as the ledger would be able to accommodate more transactions per block. Moreover, this upgrade would result in lower fees charged per transaction. Because the bitcoin community was unable to agree on the matter, the “bigger blocks” proponents initiated the changes in the software, and the Bitcoin ledger split to form BCH.

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Thirdly, hard forks can be initiated as a way to make specific events null and void and are sometimes referred to as rescue hard forks. This happens when an undesirable event, such as widespread hacking or theft, affects the community of a token. In this scenario, the developers, in conjunction with the majority of the community can decide to fork the ledger to render the stolen tokens useless. This would also return the affected members their funds.

The DAO, a type of decentralized venture capital fund built on top of the Ethereum platform, fell victim to a hack in 2016. This resulted in the theft of a significant amount of ETH, totaling over 3.6 million ETH. To reverse the exploit and ensure community members were not left in a lurch, the developers initiated a hard fork. It is important to note that because the majority of the community was in agreement with the fork, the token retained its original name.

The “original” token was renamed ETC after a faction of the Ethereum community who disagreed with the rescue fork for idealistic reasons continued to mine the original Ethereum blockchain.

Lastly, a hard fork can happen with the sole intention of creating a new coin. Because most projects within the crypto community operate on an open-source basis, it is possible to view the code and use it to create a new token. The new token may have similarities to the parent ledger but will usually have distinct features that its developers deem to be a necessary upgrade. The new tokens will often seek to differentiate themselves from the parent coin with their name as well as branding.

Many coins have come to be as a result of a hard fork from bitcoin’s codebase. For example, Litecoin (LTC) came about once its creator Charlie Lee added a few significant details to the underlying Bitcoin code. The changes included a shorter block time, a differing hashing algorithm as well as a higher maximum coin supply. Other coins that have been created as a result of a hard fork from the Bitcoin codebase include Dogecoin and Peercoin.

Why Are Hard Forks Controversial?

Some cryptocurrency community members disagree with the idea of hard forks because transactions on decentralized ledgers were designed to be irreversible. They believe that this is a principle that should be left intact. In fact, this is one of the main reasons that some members of the Ethereum community refused to support the hard fork after the DAO hack and continued to mine the original Ethereum blockchain to generate ETC.

In recent months, hard forks have gained the reputation of being just another way for people to leverage cryptocurrencies to make money without adding any value to the community. When a hard fork results in the creation of a new coin, holders of the old coin receive “free” coins equal to what they hold in their wallet of the original coin.

While some cryptocurrency community members who are more focused on profit than innovation support hard forks because of this, it is a fact that others vehemently oppose them due to the lack of originality or added value of the many of these projects.

Additionally, the community has witnessed a number of hard forks that were merely scams or have the potential to turn out to be scams. Forks such as MoneroV and Litecoin Cash forks were seemingly only launched to leech of the name of its successful predecessor to generate a profit for the developers behind these projects.

Hard forks are an inherent part of the cryptocurrency economy due to the open-source and decentralized nature of cryptocurrencies. They can be used to serve the community by enhancing an existing cryptocurrency project by adding new functionalities or improving a network’s scalability. However, the recent wave of hard forks that have very evidently only been launched to make some people “crypto rich” have not only given hard forks a negative connotation but have also put a dent in the integrity of the broader crypto community, which is not helping the growth of cryptocurrencies.

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