A blockchain fork is essentially a collectively agreed upon software update. While forks follow familiar patterns, each fork is unique and produces a different result. It is important to know the context and details of each fork to take advantage of the drastic and sudden changes that often occur. Let's see what forks in blockchain are and how we can differentiate them.
What is a blockchain fork?
A blockchain fork is essentially a collectively agreed upon software update. Blockchains rely on decentralized groups of validators working collaboratively. Each individual validator, commonly known as a “full node,” runs the software necessary to verify the public ledger of the blockchain and keep the network secure. The more full nodes simultaneously running the software, the more secure the network will be.
Simplified diagram of Ethereum client features. Source: Ethereum.org.
Fundamentally, each full node must run the same piece of software to access the same shared ledger. In other words, each full node that runs the core Bitcoin software (i.e. Bitcoin Core) has access to the blockchain ledger of Bitcoin and therefore you can verify Bitcoin transactions and access Bitcoin transaction history. But a full node that only runs the core Ethereum software (i.e. Go-ethereum) cannot access the Bitcoin blockchain.
Types of forks blockchain.
The software version also matters. If the Bitcoin Core developers (or anyone else who can convince enough full nodes to switch to their software) update the Bitcoin code to install new features or change important parameters, updated software may not be compatible with the previous version of the software. Let's see what types of forks we can find in blockchain technology:
Hard forks.
The forks that are incompatible with previous versions of the software They are known as hard forks (hard forks). The hard forks consensus rules often change (i.e. block size, mining algorithm, consensus protocol) in a way that makes older versions of the software are incompatible. For example, Ethereum's Merge update will change the rules of the consensus protocol as Ethereum begins its shift from Proof of Work (PoW) to Proof of Stake (PoS).
Ethereum's The Merge update explained. Source: GARP.
When Ethereum was upgraded thanks to the Merger, the upgrade was a hard fork. Full nodes that chose not to update their software anymore will not be compatible with updated PoS nodes. Fortunately, Ethereum hard forks are usually uncontroversial and the majority of the network agrees to upgrade. Otherwise, a full node running the updated PoS software would not have exactly the same ledger as a full node running the older version. Given the each node would have different consensus rules, they would essentially be running a separate blockchain.
Soft forks.
However, there are some forks that are compatible with older versions of the software. Soft forks They are software updates that still work with previous versions. For example, Bitcoin's SegWit upgrade was a soft fork. When SegWit was activated, a new address class (Bech32) was created. But those using older P2SH addresses were not affected by the update. A full node running version 0.1 of the Bitcoin Core software could send a non-SegWit transaction to a node running the updated SegWit software and the transaction would still go through. As long as at least 51% of the hash power shifts to the upgrade soft fork, older versions of the software will continue to work (if older versions propose invalid blocks, they will temporarily form "old chain only" versions of the ledger) .
Contentious Hard Forks.
Not all bifurcations are unanimously agreed upon by the full node community. Most of the most famous (and notorious) forks were considered hard forks and were in fact very controversial. A Contentious Hard Fork occurs when a significant portion of the full nodes disagree about what version of the software to run. For example, him Ethereum DAO hack (where $55 million worth of ETH was stolen) sparked heated debate within the community. Many full nodes wanted to reverse the hack and return the stolen funds. However, many others argued that reversing the attack would fundamentally undermine the legitimacy of the blockchain. The two parties could not reach an agreement. The community that was against reversing the hack finally broke away and formed a new blockchain, Ethereum Classic.
Importantly, the owners of the original token often will receive proportional amounts of the new token created in the contentious hard fork. After the Ethereum Classic fork, all ETH owners received ETC proportional to the amount of ETH they owned.
Forks controversial.
During the past month of May 2022 The Terra protocol and its entire ecosystem collapsed, taking the entire cryptocurrency ecosystem ahead. After having witnessed one of the most notorious crashes in the history of the crypto space, having lost close to 28 billion capitalization in less than a week, from the direction of the Terra protocol they launched proposals to be able to revive the project after all the controversy that has dragged on throughout this last month. Suddenly, the bells rang when the theme of perform a hard fork about the Luna blockchain.
After the errors caused by the instability of the yield payments of those who blocked UST tokens, it was commented that performing a hard fork in the protocol would be the most reasonable, since variables had to be introduced/modified that would not be compatible with the previous version. This proposal had a lot of weight, but finally no such hard fork of Luna Classic was made, but directly a new blockchain from a Genesis 0 block. However, the trust placed by investors has already vanished along with the billions of dollars that their community lost.
Narrative change at forks.
Ethereum price plummeted after the DAO hack and contentious Ethereum Classic hard fork. Because of this, contentious hard forks were generally considered detrimental to the main chain. However, that changed when Bitcoin Cash was forked from Bitcoin. Bitcoin Cash was the result of a multi-year debate about the best way to increase the number of transactions within the Bitcoin network. Although several solutions were proposed, none received overwhelming adoption. One proposal advocated, among other things, for a larger block size. This eventually created a controversial hard fork that was called Bitcoin Cash.
Based on the Ethereum DAO Hack fork, many thought that this fork would lead to a decline in the price of Bitcoin. But instead, Bitcoin began a skyrocketing rise shortly after the launch of Bitcoin Cash in August 2017. Bitcoin Cash followed a similar pattern to Bitcoin and increased rapidly from approximately $300 per coin to a peak of over $3.000 per coin in December 2017. After the meteoric rise of Bitcoin Cash, the narrative around controversial hard forks changed. Now, contentious hard forks are often described as "free money" or as a general positive for the main chain because the group that creates the feud you are free to work on your own version of the protocol.