• A hard fork occurs when one cryptocurrency (like bitcoin) breaks off to form a new currency (like bitcoin cash).
  • Hard forks take place when the community wants to make a significant upgrade or disagrees on how to move forward.
  • Examples include bitcoin cash, ethereum classic, and bitcoin gold.

Cryptocurrency Hard Forks: Explained

A hard fork is when one cryptocurrency spins off to create another. Think of it like a train track splitting in two. The new coin (and its blockchain) takes a new direction from the old, but they share the same history. It’s a simple fork in the road.

bitcoin hard fork diagram

Let’s take the example of Bitcoin Cash, which is a hard fork of Bitcoin.

In 2017, the Bitcoin community disagreed on how to make improvements to the network. One group wanted to stay true to the old rules and “protocol.” Another group wanted to make drastic changes to how transactions were processed.

Unable to reach an agreement, the second group “forked” off to create a new blockchain. Bitcoin Cash was born.

Bitcoin Cash shares the same blockchain as Bitcoin right up until the moment it forked. From that point onwards, Bitcoin Cash took its own path with its own rules.

bitcoin cash hard fork
Image credit

Bitcoin has forked countless times as the community seeks to improve the technology or disagrees on how to move forward. These forks are not always successful.

How Hard Forks Work

Every blockchain enterprise has its own rules. Those rules dictate how the system works. How large is each block? What rewards do miners get? How are fees calculated? And so forth. One day, the community disagrees on some tidbit, such as whether new code should be introduced or whether participating miners should receive a bonus.

A successful fork is where most of your users agree, collectively make the changes, and move over to the new blockchain. A contentious or experimental fork is where your users split. Some might stick with the present blockchain, some may migrate to the new blockchain, and some use both. Soon you have two versions of your cryptocurrency with different rules.

A failed fork occurs when too few users leap to the new blockchain. That new cryptocurrency quickly becomes worthless.

Hard forks also happen in the following cases:

  • To fix important security risks found in older versions – It took the dollar more than 300 variations to become today’s counterfeit-resilient currency. Blockchain developers aim to make their blockchains 100% breach-free.
  • To add new functionality – Windows 10 is enormously different from its very first version. Blockchain developers upgrade their versions from year to year, adding functions for improvement.
  • To reverse transactions – If website developers suspected a security breach, they could block the previous fork, declaring all previous transactions non-existent. Their new fork would herald a new start.

Hard Forks Can Mean Free Money

The new blockchain is a replica of the old, so all transactions barreling through blockchain A are replicated on blockchain B. If you’ve joined blockchain B, you receive those coins as well as new ones that are mined on your blockchain. Those new coins are known as an airdrop.

crypto airdrops falling

Image credit

When Bitcoin Cash forked, everyone holding bitcoin received the same number of bitcoin cash tokens, essentially for free.

There is a catch, though. You’ll want a secure, private wallet that supports the airdropped coins on the new fork. If you keep your cryptocurrency on an exchange like Coinbase or Binance, the exchange may keep them.

You’ll also want to check whether the forked coin has a future. The unfortunate truth is that most coins fail. Look at the reputation of the fork developers; what are their reviews? Also, see whether credible blockchain services have inspected and credited the open source code of this new coin.

Are Hard Forks a Good Thing?

Some people in the crypto community oppose forks fearing that the new coin will devalue their old. However, a successful fork usually means good news for traders.

When a new fork is announced, we often see a flurry of traders rushing to buy the coin hoping to get free airdrops. That naturally increases the price.

It’s true that the forked coins often become worthless, but some are successful and ultimately valuable, such as bitcoin cash. You’ll often see a profit from a successful airdrop.

Sometimes the hard fork is widely opposed by the majority of people. When that happens, it can strengthen support for the original coin, sending the price up.

Hard Fork Example: Bitcoin Cash

bitcoin cash logo

In August 2017, a group of Bitcoin stakeholders including investors, entrepreneurs, developers, and China-based miners quarreled over the size of the Bitcoin block. Some wanted to keep the one megabyte (MB) limit coded into Bitcoin by Satoshi Nakamoto himself. Others wanted to increase the size to two MB while other stakeholders fretted it should exceed 9,000!

The team eventually split. Bitcoin loyalists adhered to the old protocol, while critics created a new coin called bitcoin cash.

Bitcoin cash never became as popular as the original bitcoin. In December 2017, bitcoin cash was worth $4,355.62. August, 2018, bitcoin cash sold for $519.12. The research firm Chainanalysis noted that in May 2018, the 17 largest payment processing services processed bitcoin cash payments worth US$3.7 million, down from US$10.5 million two months before

To date, Bitcoin’s hard fork iterations include the following:

  • Bitcoin Platinum (BTP). December 1, 2017. A scam, invented by a South Korean teenager in an attempt to kill the price of bitcoin and profit by betting against it.
  • Super Bitcoin (SBTC). December 15, 2017. Among other changes, Super Bitcoin included smart contract functionality, taking a leaf out of the Ethereum blockchain.
  • Bitcoin God (GOD). December 25 2017. Chandler Guo proclaimed Bitcoin God a Christmas gift to bitcoin holders. Most called it bizarre
  • Bitcoin Uranium (BUM). December 31, 2017. BUM was an attempt to democratize Bitcoin, which critics said had become dominated by a small group of entities over-exerting their power over miners. BUM was created as Satoshi’s original vision. It bummed.
  • Bitcoin Cash Plus (BCP). January 2, 2018. Promised “low fees and reliable confirmations”. It flunked almost from the start.

Bitcoin also spawned Bitcoin Diamond (BCD), Bitcoin Gold (BTG), Bitcoin Atom (BCA), Bitcoin Core (BTX), Bitcoin Private (BTCP or ZCL) and Segwit, among others.

Segwit was a soft fork which is quite a different creature.

What is a Soft Fork?

Hard forks are unique in that the changes are incompatible with the previous protocol. Soft forks are different because the software or protocol changes are compatible with the previous versions.

Think of a hard fork being the difference between PlayStation 3 and PlayStation 4. You can’t play PS3 games on PS4 and you can’t play PS4 games on PS3.

A soft fork, on the other hand, is more like Microsoft Excel. You can use MS Excel 2015, even with MS Excel 2005 running in the background. The upgraded version is compatible with the old. At the same time, the updates in the newer version don’t appear in the old. MS Excel 2015 shows features that don’t appear in MS Excel 2005. The new soft fork has additional – or different – features to its older version.

In other words, soft forks have backward compatibility. The new chain contains the previous rules with additions, while the previous blockchain continues unchanged.

segwit soft fork diagram

Image credit: Reddit user u/k06a

As you can see in the diagram, the SegWit fork of Bitcoin is a “soft fork.” It doesn’t create its own blockchain. It simply upgrades and continues the previous chain. In contrast, the hard forks, like Bitcoin Cash and Bitcoin Gold actively split off.

With a hard fork, you need 90 to 95% of the stakeholders, or nodes, to accept your changes for the system to succeed. For a soft fork, you only need a majority of miners to upgrade and agree on the new version.

Soft Fork Example: The SegWit Solution

One of Bitcoin’s greatest frustrations is its slowness. Ten transactions take about a second to slip through compared to Visa’s 5,000-8,000 transactions per second. This is called the “scalability” problem.

In October 2016, Pieter Wuille, a Bitcoin Core developer, tried to treat this problem by modifying the appearance of the Bitcoin block.

Bitcoin blocks have two sections:

  1. The header with its cryptographic data.
  2. The body with transactions and sender/receiver data.

The bulkier the block, the slower traffic.

Wuille divided transactions from sender and receiver data. He gave each their own blocks, creating, in effect, a freeway where bitcoin transactions zoomed through, while so-called witness boxes (SegWit, short for Segregated Witnesses) with scripts and signatures used the parallel lane.

SegWit is called a “soft fork” since it was compatible with Bitcoin’s old code. All Bitcoin needed was 95% of its miners to accept the changes, which happened in less than a year. The platform didn’t need a separate blockchain and currency to make alterations work.

Update:

Critics complained that Segwit fell short of solving Bitcoin’s congestion problems and that the platform needed major changes to decongest its platform. Dissension led to the string of hard forks like the previously mentioned Bitcoin Cash (BCH). In 2017, Bitcoin developers also promoted hard fork SegWit 2x to magnify blocks from 1 MB to 2 MB. That fork died a week before it was scheduled to occur.

Bottom Line

A hard fork:

  • Results in two new blockchains, both of which share the same past.
  • Changes a fundamental aspect of the blockchain or the rules that govern it.
  • Is not compatible with previous versions.

A soft fork:

  • Does not create a new coin or split the blockchain.
  • Upgrades the system with new features that are compatible with the old version.

It’s as simple as that.

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SegWit, short for Segregated Witness, is a system that makes your Bitcoin transactions faster.

Why do we need SegWit?

Think of a single lane highway with 5,000 vehicles driving along smoothly. As traffic builds to 50,000 and more, that single lane becomes clogged forcing you to wait hours on end in congested traffic and maybe miss your appointment. That’s Bitcoin. It’s called the scalability problem, and it’s an issue that the smartest blockchain developers have been trying to find solutions to for years.

SegWit is the Bitcoin team’s solution.

The scalability problem

One of Bitcoin’s most aggravating issues is its lack of speed. Ten transactions take about a second on average to process. Compare that to payment companies like Visa that are able to process around 5,000 to 8,000 transactions per second.

Pay more and you can get yours to the front of the queue, but that makes Bitcoin an expensive and undemocratic system. Besides which, Bitcoin wants to make its platform as efficient and as whizzingly fast as the internet to retain its users and grow its appeal.

The SegWit solution

Bitcoin transactions are made up of blocks with each block able to absorb no more than 1MB of data.

The blocks come in two parts: a header and a body. The header stores a cryptographic hash of the previous block, along with a time signature and other data. The body stores the transactions, including sender data and receiver public keys, which shows you this is a legitimate transaction. Each part takes up room and increases the mass of the block. The signature part alone that is needed to validate the information takes up around 60 percent of its bulk.

In October 2016, Pieter Wuille, co-founder of Blockstream and a Bitcoin Core developer decided to hack of the signature part and put it in a separate block.

Model: Structure of Segregated Witness

This block, called the “witness” block is separate to Bitcoin’s original block. We now have more room in our core block to slip in more information.  The block becomes lighter, so Peter’s idea also helps Bitcoin transactions move more efficiently.

In essence, Bitcoin added a parallel lane to its highway to divert some of its traffic from Route A (call it that) to Route B. Route A has the blocks with sender and receiver data, while the new parallel lane contains the “witness” segment with the scripts and signatures.

Result? The highway is less congested. Your Bitcoin transactions slip through faster.

Other benefits

  • Node performance – The Bitcoin platform is less congested, so nodes can verify blocks, or transactions, faster.
  • Cheaper transactions – At one time, increased demand raised fees. Now, Bitcoin can reduce its fees.
  • Transaction malleability – Originally, the sender’s signature, or the transaction id (txid), was vulnerable to an intruder hacking and changing it and, thereby, hacking the transaction. By SegWit moving the signature from the transaction data to another “lane”, it protects your transaction data from being hacked. 
  • Linear scaling of signature hashing operations – For certain transactions, adding more data, expands the amount of time that each signature needs to be verified. Segwit resolves this by changing the calculation of the transaction hash for signatures so that each byte of a transaction only needs to be hashed no more than twice.
  • Increased security for multi-signature transactions – SegWit provides two different scripts; one to a single public key that is vulnerable to hacking (and therefore to payments being stolen) and another that directs payments to a script hash. This boosts security for multi-signature transactions.
  • Building on top – SegWit frees Bitcoin for the development of second layer protocols, like its lightning network. SegWit activation also boosted development work on other features such as MAST (which enables more complex bitcoin smart contracts), Schnorr signatures (which would enable another transaction capacity boost) and TumbleBit (an anonymous top-layer network).
  • Protects Lightning Network – SegWit is great for payment channels like the Lightning Network (LN), where a vulnerable signature originally prevented more people from using it to remit Bitcoin. 

Where is SegWit now?

In August 2017, Bitcoin finally integrated SegWit into its system. SegWit is called a “soft fork” which means it is compatible with Bitcoin’s old code, minimalizing the hassle to make SegWit work. A hard fork, in contrast, is a system that is so totally incompatible with the old that a separate blockchain and currency is needed to make it work. 

In SegWit’s case, all the system needed was 95 percent of Bitcoin miners to accept the changes, which happened in less than a year.

In 2017, Bitcoin came out with a controversial hard fork SegWit 2x which increased block sizes from 1 MB to 2 MB. Most of the crypto community resisted SegWit 2x due to its ambitious changes. Consequently, the hard fork was canceled only a week before it was scheduled to occur.

What are the main problems with SegWit?

For one, miners and mining pool operators dislike SegWit. Transactions that go through Lightning Network are in a separate channel (i.e., the parallel “line”), which means these transaction fees will not flow to miners.

Some Bitcoin services – like Bitcoin wallets – have been slow to support the SegWit changes. In February 2018, only 14% of Bitcoin transactions were made using SegWit Bitcoin. The numbers have improved since then, but the network is still in the woods.

Critics complain that SegWit doesn’t go far enough to solve the scalability problem. They maintain that only major changes to the Bitcoin platform and to the way Bitcoin handles transactions can decongest transaction flow.

Finally, SegWit has caused divisions in the bitcoin community leading to several hard forks, such as Bitcoin Cash (BCH).

coin renders

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