Soft Fork vs Hard Fork: Detailed Guide

Every system requires an upgrade or change at some point. There is often a need to introduce an additional function or correct a minor error in the layout. Several software developers fix bugs and often release updated versions of their wares. Blockchain users may also propose to perform some changes in a blockchain even though the blockchain system is an immutable digital ledger technology (DLT). A fork is a set of actions needed to change a blockchain. There are two types of forks: the soft fork and the hard fork.

Forks as Evolution of Blockchain

Since 2008, the blockchain system has remained a permanent and unchanging system. Users must comply with the principles of the blockchain, there was no room for complaints. Bug issues, unauthorized transaction activities and security loops cannot be fixed on the system. Fortunately, a spectacular transformation occurred in 2016 when the founder of Ethereum (ETH), Vitalik Buterin, introduced the fork process. He implemented it to reverse the stolen fund to a project launched on Ethereum. After that, the fork became a powerful tool used in blockchain development. It helped solve various problems suggested by blockchain users.

Understanding soft forks

A soft fork is a backwards compatible method of adding a new set of rules to a blockchain network without forcing the nodes and miners to upgrade to the current blockchain version. However, the blockchain requires many nodes and miners to switch to the upgraded version. This type of fork allows for interaction between old and new blockchains.

A perfect example of a soft fork is SegWit (Segregated Witness) of Bitcoin (BTC). The fork was activated in 2017 to fix transaction malleability and help Bitcoin scale. The participants on the Bitcoin blockchain agreed to solve some trivial challenges in the chain. Some of these problems included insufficient block size and low on-chain transaction speed. As a solution, they introduced SegWit to free up space that could hold more transactions in the chain. The new blockchain accepts more transactions within 1MB at a faster speed, speeding up the transaction confirmation process.

Understanding Hard Forks

Unlike soft forks, hard forks create another blockchain path parallel to the original blockchain. Here, the upgrade requires all existing nodes and miners to join the new chain; this fork is backwards-incompatible. The old and the new chain work independently without any kind of interaction between them. Blockchains can implement hard forks to fix security flaws, add new trading features, change the entire version of the cryptocurrency, or reverse transactions.

After the SegWit soft fork, some Bitcoin nodes complained about the network’s inability to accept larger transactions. These nodes and developers created a separate blockchain called Bitcoin Cash (BCH). They designed the Bitcoin Cash network to accept transactions of up to 32MB. Bitcoin Cash successfully sits at 30 in market capitalization rankings. The developers of Bitcoin Cash hope traders will abandon the Bitcoin blockchain due to its high transaction fees. Later, Bitcoin Cash split into two groups: Bitcoin Cash ABC and Bitcoin Cash SV. Each fraction of Bitcoin Cash had its different goals. One faction wants to maintain the system, and the other plans to increase the block size from 32MB to 128MB. Other Bitcoin hard forks performed include Bitcoin Gold (BTG), Bitcoin Diamond (BTCD), Classic, Unlimited and so on.

In 20I6, the Decentralized Autonomous Organization (DAO) launched on the Ethereum network. The DAO raised over $150 million from its fundraising activity. After the launch of the DAO, hackers stole over $60 million in Ethereum from investors. Ethereum created a new blockchain to help the original owners retrieve the money from the hacker’s wallet address. In addition, they performed a soft fork to prevent the hackers from transferring funds from the wallet.

Soft Forks vs. Hard Forks

A blockchain is free to choose its preferred fork. In particular, a hard fork is incompatible with the previous blockchain version, while a soft fork is compatible with the old version. Hard fork completely changes the blockchain protocol, requiring all nodes to upgrade to the new version. Meanwhile, a soft fork only requires an optional upgrade to the current version. Unfortunately, developers can easily manipulate miners to validate transactions against the regulations of the blockchain. A hard fork makes a blockchain vulnerable to loss of funds and double spending. There can be discord in a community if the hard fork is disputed. A well-planned hard fork can ensure mainstream adoption. Most times, a blockchain community can perform soft forks without social rift. However, many blockchain developers and nodes prefer the hard fork.

Benefits of forks for investors

There are several advantages to forks. It has provided a path to change the blockchain, an immutable digital ledger technology. A fork allows for the progressive development of a blockchain. The fork also allows traders and investors to agitate for improved blockchain performance. It provides the opportunity to increase storage and speed options. After a successful hard fork, investors will receive an equivalent amount of the original crypto in the new currency.

Unfortunately, the fork process is vulnerable to dumping attacks by crypto whales and large investors. They can buy up large amounts of the original token before the fork and get a larger amount after the fork. As expected, the fundamental impact increases the price of the parent crypto. These whales then sell the pre-acquired tokens, lowering the price of the tokens. It’s an unfair way to take advantage of a fork. However, some blockchains may suspend trading activities before the fork begins.

Recently, Ethereum completed a shift from its proof-of-work (PoW) mechanism to proof-of-stake (PoS). Unlike PoW, PoS provides a more secure, less energy-intensive and improved platform for implementing new scaling solutions. Interestingly, traders can now trade at relatively low gas fees. Ethereum halted all trading activities a few hours before the merger occurred. Perhaps Ethereum’s action was due to the flying speculations of a pump in the price after the process.

Conclusion

A good deal of software, games and systems require timely upgrades of the operating mode. This routine does not exclude the blockchain network. Forks allow the blockchain to implement proposed upgrades. Blockchain developers, miners and nodes can improve the efficiency and productivity of the blockchain through a fork.

Hard forks and soft forks play important roles in maintaining and upgrading a decentralized network. Forks also help tighten the security of a blockchain.