To Fork or Not to Fork, That Is the Question

So what is a fork? A fork occurs as a result of changes to the existing code of a cryptocurrency. There are two types of forks - a soft fork and hard fork.

Soft fork

A soft fork is a change of rules that is backward compatible. This means that even if network participants do not upgrade their software, they can continue to validate transactions using the older version. A soft fork requires the acceptance of the majority of participants, while non-upgraded participants will remain compatible with the network, but their functionality will be affected, and they will have to start using the new rules in the end.

Soft forks are most often introduced by cryptocurrency developers or major mining pools in order to slightly change the operation of the network.  

One of the examples of a soft fork is SegWit (Segregated Witness). SegWit is a protocol upgrade that changed the way data is stored. 

SegWit was introduced in order to fix a bug in the bitcoin code. Before the introduction of SegWit everyone could change small details that modified the transaction id, but not the content, which impeded the development of more complex features, such as smart contracts. SegWit removed the signature information, it allows storing it outside the base transaction block. As a result, changes to signatures and scripts are introduced without affecting the transaction id.  

Hard fork

As Investopedia explains it, a hard fork is a permanent divergence from the previous version of the blockchain, and nodes running previous versions will no longer be accepted by the newest version. Hard forks are used to eliminate security risks, add new functions, or reverse transactions.

Hard forks also require the acceptance of network participants, but if part of the miners disagree, a split will occur, that is, two separate chains will emerge on the basis of one code. They may exist simultaneously, but generally, only the one that was selected by the majority of users survives, while the other gets abandoned.

Litecoin Cash is an example of a hard fork, its officially announced purposes were to ensure improved transaction processing, enhance mining capacity and improve the bandwidth availability. It exists in parallel with the original Litecoin network. 

Forks may have several advantages. For miners, forks present opportunities to earn, as it is much more profitable to mine new coins related to a popular network than old coins already mined by a large number of users. Forks allow eliminating bugs and other issues that reduce the popularity of the project. But many experts say that most forks are created only for the purpose of earning money. For instance, developers say they are going to improve the project, create a fork and raise the price for new coins.   

Both forks create a split, but a hard fork creates two blockchains, and a soft fork is meant to result in one. That said, most experts are positive about forks, as, in their opinion, the trend to create forks signals that the market is developing.