What Is a Hard Fork : An Introductory Guide

A hard fork is used to describe a radical change in the Blockchain that leads to the replacement of an existing protocol, that invalidates or validates existing transactions or blocks.

This necessitates that all the parties to the specific Blockchain enforce a system upgrade to accommodate the new software protocol. So without any further ado, let’s delve into what a hard fork is.

When a hard fork occurs, there is an irreversible departure from the erstwhile Blockchain and its authorization procedures, which shuts out all the nodes that are not updated. Essentially, what happens is that the previous path is shut out, though it continues to exist, while the new path adheres to the new protocols.

In most cases, the users remaining on the old Blockchain have to adopt the new protocols and upgrade to the new software accordingly. While the technical details can be avoided here, it should be noted that the processes and systems that are not upgraded will not be able to use the new interface.

The Bitcoin Example

There are several hard forks that have taken place on the Bitcoin Blockchain compared to the Ethereum Blockchain. While all cryptocurrency hard forks aren’t successful, there are a few that are worthy of mention.

In 2017, a hard fork occurred in Bitcoin that gave rise to Bitcoin Cash, and this essentially meant that a new cryptocurrency was born. While Bitcoin continued with its existing protocols, Bitcoin Cash came up with its own Blockchain and enhanced algorithms.

Other notable hard forks on the Bitcoin Blockchain include:

  • Bitcoin Gold hard fork occurred in October 2017
  • Bitcoin Segwit2x hard fork occurred in November 2017
  • Bitcoin Diamond hard fork occurred in November 2017.

Segwit2x also known as B2X failed to see the light of day, and was eventually canceled despite the initial promise of support by some major exchanges.

How the Bitcoin Hard Fork Turned Out

The Bitcoin Cash innovation was the outcome of brainstorming and reviews by experts that led to a faster pace of transactions on the Bitcoin Blockchain.

The challenge of congestion on the Bitcoin Blockchain was resolved with a feature that made it possible for the expansion of block size limits to 8MB, which led to faster processing times. The impressive run of Bitcoin Cash led to a petition by Coinbase users in December 2017, proposing its adoption as the default currency on the platform.

As noticeable with hard forks, while Bitcoin Cash enjoyed the benefit of the new protocols, Bitcoin lagged behind in transaction turnaround times.

Hard Forks and Cryptocurrency Market Value

When a hard fork occurs, it leads to the birth of new competition in the marketplace. When Ethereum Classic was forked, it became an alternative to Ethereum. EtherZero is the latest hard fork on the Ethereum Blockchain.

Bitcoin Cash has amassed a massive following since its debut, and same can be said of Bitcoin Gold. In effect, there is a loss of market share each time a hard fork occurs.

Over the course of the past 12 months, Bitcoin has lost close to 50 percent of its market share to other cryptocurrencies spearheaded by Ethereum and Bitcoin Cash.

Positive effects of hard forks include:

The efficiency of the Bitcoin Blockchain is going to be enhanced as a result of the work of researchers. Innovative technologies like the Lightning network and Waves have proposed options that can make Bitcoin more efficient.

In other words, hard forks can lead to improved and efficient Blockchains.

The other positive effects of hard forks can be seen in efficiency and enhancement of the possibilities of the old nodes. Bitcoin Cash has a greater transaction speed compared to Bitcoin.

More altcoins are seen in cryptocurrency marketplace of as a result of the scalability, transaction speed, and security of the Ethereum Blockchain.

Futuristic applications of the Blockchain are becoming a reality with strides made in energy, healthcare, banking and other areas of human endeavor.

Inventing Segregated Witness

The consensus mode adopted by Segwit effectively eliminated the possibility of signature cloning, that can lead to the loss of digital assets. Segwit, as developed by the team of Johnson Lou, Eric Lambrozo and Pieter Wuille, heralded better security for Blockchain transactions.

The effect that Segwit had on transaction processing was to eliminate signature data as this was no longer needed in the event of the consensus approach to transaction validation. Eliminating signature data effectively freed up space in order to accommodate more transactions.

The effect of the segregated witness or Segwit is that hacking of transactions is made impossible. This innovation makes it possible for a transaction shutdown when a compromise of the system is noticed.

When Segwit arose, it made it possible for the old Blockchain protocols to be modified without leading to a hard fork. In other words, this modification was a soft fork, as it only led to a change in transaction authorization without leading to the termination of access by users on the old node.

Litecoin is an example of the impact of Segwit, as it enhanced the speed of processing of transactions (3x faster) on its Blockchain using the updated protocols. Litecoin also offers a pathway for Bitcoin transactions to be expedited if integrated into an existing Bitcoin Blockchain.

The entry of Segwit made it possible for the nodes utilizing the old Bitcoin software, not to go into obsolescence. Segwit was utilized to ensure that the updated platforms could seamlessly integrate with the old.

Segwit made it possible for users of the old Bitcoin node to continue with operations initiated on the new, and this was as a result of the deployment of a soft fork algorithm.

Users of the old node are able to process transactions and access the Bitcoin Blockchain while the operators phase out the old software over time. The time lag allowed is not possible in hard forks as the new and old nodes become immediately incompatible when it occurs.

Bitcoin Hard Fork and Bitcoin Cash

To understand the effect of hard forks, it is worthwhile to examine the effect of such a step on Bitcoin Cash when it got forked. Many operators of cryptocurrency exchanges hesitated at the time to support Bitcoin Cash.

Failure to access the new nodes due to the cost of infrastructure and skepticism could have been some underlying reasons for the standoff by Bitstamp and Coinbase. Eventually, Bitcoin Cash got support across the globe from several exchanges, and it has grown to become the 4th largest Cryptocurrency by market capitalization.

Some exchanges took the precaution of suspending daily trades, while the Bitcoin fork unfolded until stability returned to the market. When transactions resumed afterward, users of the exchanges counted their losses for the number of days they could not trade.

How Private Keys Came to the Rescue

Bitcoin users that have accounts with exchanges are at a disadvantage if they have no private keys. Having a private key makes it possible for tokens to be transferred using a public address and a private key authorization.

At such intersections when trading becomes impossible in exchanges, private keys enable token holders to transfer their tokens to other cryptocurrency marketplaces or peer-to-peer networks. Moreover, by using a wallet, tokens can be sold and transferred with ease.

Bitcoin Gold Example

Bitcoin Gold was forked in October 2017 and it runs on its Blockchain distinct from Bitcoin and Bitcoin Cash respectively. The immediate benefit derived by holders of Bitcoin when this hard fork took place was the award of bonus tokens for every existing Bitcoin token held by a user.

Users who had Bitcoin Wallets were able to take advantage of the bonus offer as they got free Bitcoin Gold tokens to match their existing Bitcoin token holdings. Again, the users of the Blockchain who had no access to private keys were left out of this largesse.

When a hard fork occurs, it is evident that it comes with implications for operators and users of the Blockchain involved. In the long run, Bitcoin Cash has reduced the dominance of Bitcoin in the same way Bitcoin Gold has done.

Bitcoin Gold and Ethereum Classic as products of hard forks have also contributed to the reduction of Bitcoin’s market share.

Lessons from Hard forks

Every investor should be aware that hard forks have a far-reaching effect on transaction processing, token value, and personal wealth.

Putting the lessons from the hard forks witnessed in the past years to use will prove it worthwhile for scrupulous investors.

Some tips include:

• Have a token wallet for the cryptocurrency you hold along with private keys

• If there is an uncertainty in the event of a hard fork, wait for the mist to clear before carrying out transactions

• In the event of a hard fork, there might be uncompleted transfers or transaction completion hitches

• Use a protected wallet at all times to safeguard your tokens and prevent fraud.

I hope this article on what is a hard fork gave you an overview of forking and how it affects crypto-currencies. Let me know what you think in the comment section!

Feature image by crazynik