Hard-forks and Soft-forks
It seems like every couple of months there’s news of a new “fork” in the Bitcoin network. For those who are relatively unfamiliar with cryptoassets, the concept of “forking” a Blockchain may seem threatening but the ability to fork is an inherent attribute of any and all open-source Blockchains and should be welcomed. Open-source software is any computer software whose source-code is made available to the public with the intent of allowing individuals to do whatever they please with said software. Bitcoin, Ethereum, and Litecoin are all built upon open-source software which provides transparency in the protocol’s operation in addition to allowing further software development in a decentralized manner. The open-source nature of these Blockchains also allows users to create what are known as hard-forks and soft-forks.
A hard-fork is when the Blockchain is split, creating two Blockchains. The original Blockchain still operates under its original set of rules while an additional Blockchain operating under a different set of rules is created, stemming from the block wherein the hard-fork was implemented. This new Blockchain runs under a modified set of rules chosen by the developers of the forked Blockchain and both iterations of the Blockchain will run concurrently in perpetuity. Both Bitcoin Cash (BCH) and Ethereum (ETH) were born out of a hard-fork from their original Blockchains, Bitcoin and Ethereum Classic. Although drastically different in their reasons to fork, BCH being more contentious than ETH, both of the aforementioned Blockchains have been operating along-side their original counterpart and have become examples of a well executed hard-fork.
A soft-fork is a backwards-compatible “addition” to the Blockchain’s protocol. This means the soft-forked Blockchain follows the rules of the original Blockchain in addition to following the set of rules belonging to the fork. This serves as a way to add features to the original overall protocol and does not necessarily require nodes on the network to undergo any software upgrades. As a consequence of that, the new soft-forked Blockchain’s adoption is not final and exists in proportion to the number of nodes running the updated software. If no nodes adopt the upgraded software, the soft-forked Blockchain will cease to be generated and the original Blockchain will continue on. If the majority of nodes choose to implement the upgraded software, the new Blockchain will continue on while the original’s blocks will become orphaned. By implementing soft-forks, developers are able to advance the tech underlying the Blockchain of their choice and is seen as a method to improve existing coins.
What are the implications of a fork for token-holders of the original Blockchain?
Whenever a Blockchain is forked, the resulting Blockchain is essentially a clone of the original Blockchain that operates under a different set of rules. Thus, any token-holders of the original Blockchain will also own the same number of tokens on new Blockchain as well given that they are holding those tokens when the fork is implemented (given the tokens are generated at a 1:1 ratio). For a soft-fork, users may treat the Blockchain as though it was never “forked” in that everything remains the same apart from the added features that the soft-fork implemented to the Blockchain protocol. In the case of a hard-fork, since two separate Blockchains will be “competing” against one another, token holders are given an equal stake in both Blockchains. For example, if a Bitcoin holder were to have 100 BTC prior to the Bitcoin Cash hard-fork, they would own 100 BTC in addition to 100 BCH following the fork. This inherent property of how Blockchain forks are implemented should give users ease of mind in that they do not need to perform any anticipative actions to have an equal stake in both iterations of the Blockchain. Having said that, although you are entitled to them, claiming the forked coins can be somewhat convoluted when holding tokens on the various exchanges and wallet clients available today. During previous forks there have been instances of exchanges or wallet clients refusing to give users access to their forked tokens, leading many to err on the side of caution and always hold their tokens in an a wallet where the fork will be supported. Most hardware wallet companies actively support forks and are a safe bet both in that they provide increased security relative to hot wallets and allow you to claim your tokens without needing to expose yourself to a less secure environment.
bitcoinwiki. Hardfork. Retrieved February 12, 2018 from: https://en.bitcoin.it/wiki/Hardfork
bitcoinwiki. Softfork. Retrieved February 12, 2018 from: https://en.bitcoin.it/wiki/Softfork
Investopedia. Soft Fork. Retrieved November 20, 2017 from: https://www.investopedia.com/terms/s/soft-fork.asp
Investopedia. Hard Fork. Retrieved November 20, 2017 from: https://www.investopedia.com/terms/h/hard-fork.asp