The mechanics of hard forks. A deep dive into blockchain splits

One of the most notable examples of a hardfork is the split between Bitcoin (BTC) and Bitcoin Cash (BCH). In this instance, a disagreement within the community over how to handle Bitcoin's scalability issues led to a hardfork. Bitcoin Cash adopted larger block sizes to accommodate more transactions per block, whereas Bitcoin retained its original structure.

Unlike softforks, which are backward-compatible updates, hardforks result in a permanent divergence in the blockchain. As a result, anyone who holds the original currency (such as BTC) before the fork can claim coins on both the old and new blockchain (BTC and BCH, in this case).

Key characteristics of a Hard Fork:

• Backward-incompatibility. The new set of rules cannot coexist with the older versions of the blockchain.

• Blockchain split. The result is two separate blockchains if a consensus is not reached by the entire network.

• Currency duplication. Users typically receive equivalent amounts of both the original and new tokens after the fork.

Example:
In the case of Bitcoin, a hard fork might result in two distinct blockchains: one continuing as Bitcoin and another following the new set of rules, such as Bitcoin Cash. This division occurs because not all participants in the network agree with the proposed changes, leading to a split in the community.

In technical terms, hard forks introduce non-backward compatible upgrades. Nodes that do not upgrade to the new software cannot interact with the new chain, leading to a situation where two blockchains coexist independently.

• Protocol upgrades. When developers propose significant changes to improve functionality, scalability, or security, they may choose to implement a hard fork to enact these upgrades. This often occurs when existing features cannot accommodate new demands or when vulnerabilities need to be addressed.

• Community disagreements. Hard forks frequently stem from ideological differences within the community. When stakeholders disagree on critical issues such as governance, consensus mechanisms, or the distribution of rewards, a hard fork may become a solution to accommodate differing perspectives.

• Market dynamics. As cryptocurrencies evolve, market pressures may drive the need for hard forks to adapt to changing user needs, competitive threats, or technological advancements. This adaptability is essential for long-term sustainability in the dynamic cryptocurrency landscape.

When a hard fork occurs, it typically involves a decision-making process among stakeholders, followed by a software update that users must adopt. Those who choose to continue with the original chain will remain on the existing protocol, while those who support the new protocol will upgrade their software, leading to a split in the community and, consequently, the blockchain.

The process of initiating a hard fork begins with a proposal for a change in the underlying protocol of the blockchain. This could involve security enhancements, feature additions, or modifications to the consensus mechanism. The proposal is typically reviewed and debated within the community of developers, miners, and other stakeholders. If consensus is reached, the hard fork is scheduled, and the community is notified of the necessary software updates.

In decentralized networks like Bitcoin and Ethereum, hard forks are often contentious. Since these networks rely on distributed governance, getting unanimous agreement on major changes is rare. As a result, hard forks can cause significant splits within the community, leading to the creation of competing cryptocurrencies.

Execution of a Hard Fork

Once the hard fork is scheduled, miners and node operators must update their software to the new version. This new version contains the updated rules for validating blocks and transactions. At a predetermined block height, the blockchain splits into two distinct chains:

1. The new chain. Nodes that have upgraded to the new software continue to mine and validate blocks according to the new protocol.

2. The old chain. Nodes that have not upgraded remain on the original protocol, continuing to validate transactions based on the old set of rules.

This split is permanent, and the two chains operate independently from each other. In some cases, both chains can continue to thrive, as seen with Bitcoin and Bitcoin Cash, while in other cases, one chain may become dominant, and the other fades into obscurity.

Soft Forks: Backward compatibility

A soft fork is a more conservative approach to upgrading a blockchain. It introduces changes that are backward compatible, meaning that nodes running the old software can still participate in the network after the fork. In a soft fork, the new rules are stricter, but they don’t invalidate the old rules, allowing all participants to interact with the blockchain, even if they haven't upgraded to the latest version.

Soft forks are often preferred in situations where the goal is to implement a change without splitting the network. However, they have limitations in terms of the scope of changes they can introduce. Unlike hard forks, soft forks cannot implement radical overhauls to the protocol.

Hard Forks: Permanent splits

In contrast, hard forks result in a complete break from the previous version of the blockchain, requiring all participants to upgrade their software to remain part of the new chain. This permanent division can lead to the creation of new cryptocurrencies, as seen with notable examples like Bitcoin Cash, which emerged from a disagreement over Bitcoin's block size limit.

Key differences:

• Soft Fork. Backward compatible, no new chain created, old nodes can still participate.

• Hard Fork. Not backward compatible, new chain created, old nodes cannot interact with the new chain.