Hard & Soft Forks: What is the Difference?

Hard & Soft Forks: What is the Difference?

in Bitcoin, Cryptocurrency
Bitcoin's software is open source, which means that the code is free and available for all to view and utilize. However, for those wishing to participate in the Bitcoin network as a miner, node operator, or wallet administrator, updating and maintaining current versions of the Bitcoin software code ranges from important to absolutely necessary. As Bitcoin evolves, some changes need to be made to the protocol. These changes can range from adding new feature sets (such as the enabling of multi-sig) to changing a core metric of the protocol, such as increasing the maximum block size. In open source software development, a fork generally refers to the event of a project spinning off of another project by copying the codebase and running it. For example, the Debian Linux distribution is a fork of the Linux source code, meaning that Debian forked native Linux code and ran a separate project. The cryptocurrency Litecoin is a fork of Bitcoin because the Litecoin developers copied Bitcoin's code, made some changes, and launched a separate project. Changes made to the protocol can require either a soft fork or a hard fork of the Bitcoin software. Conducting a fork of the Bitcoin software differs from other open source projects because every user running a Bitcoin node needs to maintain compatibility with the network. If a miner is using a version of Bitcoin software that is not compatible with the version everyone else is using, then they would be mining the wrong Blockchain. However, miners can use different versions of the Bitcoin software and mine the same Blockchain if the different versions are compatible (compatibility is important here).  

What are Forks?


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The blockchain – the technology underlying Bitcoin – is a distributed ledger made up of “blocks” of data that is continuously growing, forming a single chain of blocks (hence block-chain). Since Bitcoin is a decentralized network, participants in the network need to agree on a common set of rules to validate the transactions, in order to achieve consensus. This, therefore, results in a single chain of verified data that everyone agrees is correct, or a single truth.  

The Great Scaling Debate


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The most recent bitcoin forks occurring after 2013 have been tethered to the scaling debate. The scaling debate has been very controversial since the inception of the 1 MB block size limit back in 2010. This protocol change implemented by Satoshi limits the number of transactions a block can hold. Currently, people believe bitcoin needs to scale to more people because the network has been experiencing intense congestion at times. Because transactions are filling up blocks to the limit, this has caused the network fee rate paid to miners to increase exponentially. Prior to 2015, it used to cost around $0.01 per transaction or less, and nowadays fees can be upwards of $5-10 per transaction. In essence, transaction bottleneck has caused participants to outbid each other, raising fees to get their transaction confirmed faster, creating an upward spiral of higher fees. There have been many meetings and agreements between miners, developers, and businesses within the bitcoin community, but they have always failed to accomplish the goal of fixing scaling issues.    

Consensus


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The thing about forks is they require consensus which means all or a vast majority of the network’s participants have to agree with the changes. The forks back in 2013 pretty much had consensus from everyone in the network. This means miners, wallet providers, and exchanges all worked together quickly to change their software, which in turn, changed the rules with consensus. If consensus cannot be met, then the network will split into two factions, and if both networks prove to be viable, then two tokens will exist. Two examples of this kind of split taking place after a hard fork include bitcoin cash and ethereum classic. For instance, when the ‘network agreement’ was not met in these two cases, two distinct blockchains sharing the same history now exist. And since there are two networks there are also two tokens now — meaning if you hold 10 BTC you also own 10 BCH if you held your private keys prior to August 1, 2017.    

Soft Fork

A soft fork is a backward compatible method of upgrading the cold wallet software and defined as a temporary split in the blockchain that occurs when these new rules are implemented. The original chain contains blocks from non-upgraded nodes, however, it will also accept blocks generated by the upgraded nodes. Meanwhile, the forked chain contains blocks only from upgraded nodes which have chosen to actively support the new rules and the soft fork.
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As soon as the soft fork is implemented it is then up to the upgraded nodes to try and reach a clear majority and remind us to reach a certain percent of the network hash rate usually by a certain block number. Otherwise, the soft fork will fail and the original chain will simply carry on unchanged. However, if a consensus is reached, the new rules are implemented across the network and any non-upgraded nodes still mining will simply be wasting their time, rehashing old invalid information both generating and gaining nothing. This, in turn, leaves the upgraded nodes blocks being recognized as the strongest and the truest chain of events. An example of a soft fork is when the new rule states that the block size will be changed from the current 1MB (1,000KB) to 800KB. Non-upgraded participants will still continue to see that the incoming new transactions are valid. The issue is when non-upgraded miners try to mine new blocks, their blocks (and thus, efforts) will be rejected by the network. Hence, soft forks represent a gradual upgrading mechanism as those who have yet to upgrade their software is incentivized to do so, or risk having reduced functionalities.
Past Examples of Soft Forks
BIP 66: A soft fork on Bitcoin’s signature validation P2SH: A soft fork that enabled multi-signature addresses in Bitcoin’s network  

User-activated soft fork

What is it? A user-activated soft fork (UASF) is a controversial idea that explores how a blockchain might add an upgrade that is not directly supported by those who provide the network's hashing power.
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The idea with UASF is that instead of waiting for a threshold of support from mining pools, the power to activate a soft fork goes to the exchanges, wallets, and businesses who are running full nodes. (In bitcoin, a full node, even if it is not a mining node, is still responsible for validating blocks.) What happens? The majority of major exchanges would need to publicly support the change before it could be written into a new version of the code. After that, the new software (which has an activation point in the future) gets installed on nodes that want to participate in the soft fork. What can go wrong? This method requires a much longer lead time to work than a hash-power-triggered soft fork. In fact, it's believed it may take as long as a year or more to write the code and get everyone ready. Further, if the majority of miners end up not ‘falling in line’ and activating the new rules, they could use their overwhelming hash power to split the network. Currently this idea is theoretical and has not been implemented.  

Hard Forks

Hard forks refer to a software upgrade that isn’t compatible with older versions. All participants must upgrade to the new software to continue participating and validating new transactions. Those who didn’t upgrade would be separated from the network and cannot validate the new transactions. This separation results in a permanent divergence of the blockchain. As long as there is support in the minority chain – in the form of participants mining in the chain – the two chains will concurrently exist.
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Hard forks can either be planned or controversial.  

Planned Hard Forks

A planned hard fork is a protocol upgrade that has already been stated on the project’s roadmap since the start. Since it is an upgrade to enhance the blockchain’s capabilities and features, the entire community – headed by the core developers – would transit to the new chain as the upgrade requires a change in the underlying codebase. This will result in the death of the old chain, as it doesn’t make sense for anyone to support it due to a lack of incentives. Therefore, this will not entail the creation of a new coin.  

Examples of Planned Hard Forks

Ethereum’s Byzantium: The first phase of Ethereum’s 2-phase upgrading plan, Byzantium occurred in October 2017 and represents an upgrading of Ethereum’s blockchain base for better scalability and the integration of private transactions
Bitcoin
Monero: In January 2017, Monero hard-forked to introduce an upgrade to its network by implementing a feature called Ring Confidential Transactions (RCT) to improve its privacy and security.  

Contentious Hard Forks

A contentious hard fork is due to disagreements within the community which results in a portion of them creating a new chain (and in their perspective a better one) by introducing major changes to the code, just like the creation of Bitcoin Cash.

Examples of Contentious Hard Forks

Bitcoin Cash: Bitcoin cash is a hard fork orchestrated by a portion of the community that wanted Bitcoin to scale better through increasing its block size from the current 1MB to 8MB. This is to allow for more transactions to be processed, thereby reducing fees that users’ pay and minimizing the bottleneck of Bitcoin’s network as usage increased. The hard fork resulted in the creation of a new currency called Bitcoin Cash.
Bitcoin
Ethereum Classic: Ethereum had a hard fork to reverse the effects of a hack that occurred in one of their applications (called the Decentralised Autonomous Organization or simply, DAO). However, a minority portion of the community was philosophically opposed to changing the blockchain at any costs, to preserve its nature of immutability. As Ethereum’s core developers and the majority of its community went ahead with the hard fork, the minority that stayed behind and didn’t upgrade their software continued to mine what is now known as Ethereum Classic (ETC). It’s important to note that since the majority transited to the new chain, they still retained the original ETH symbol, while the minority supporting the old chain were given the term Ethereum Classic or ETC.  

Spin-off Coins


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Since Bitcoin’s protocol is open source, anyone can view the code base and make changes to it in the pursuit of creating a new coin with new features. For instance, Litecoin was a fork of Bitcoin, created by changing the codebase of Bitcoin. The features of Litecoin include changes such as:
  • Average of 2.5 minutes block time as compared to Bitcoin’s 10 minutes
  • Different consensus algorithm: Scrypt instead of Bitcoin’s SHA 256
  • Fixed coin supply of 84 million instead of Bitcoin’s 21 million
 
Examples Coins That are Variants of Bitcoins (Derivatives of Bitcoin Code)
 
  • Namecoin
  • Peercoin
  • Litecoin
  • Dogecoin
  • Auroracoin
   

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