The terms used in the cryptocurrency market are a bit weird and sometimes become very difficult to understand. And, among many, one such term is HARD FORK.
As weird as it may sound, the hard fork is an essential part of the cryptocurrency market. And if you are interested in cryptocurrencies, you may want to know what a hard fork is.
This blog piece will cover everything about the hard fork in crypto, how it works, and some important hard fork events that changed the world of cryptocurrencies.
What is Hard Fork in Crypto and Why Does It Happen?
Starting with a cautionary note, it can get technical, but we promise you that you will understand everything about crypto hard forks by the end of this article. Now, let’s start with a question.
Why do tech giants like Microsoft and Google introduce new versions of their PC and mobile OS at regular intervals? Why don’t they stick to a single version and continue providing support forever?
Well, it’s pretty obvious. To include new security features and functions to cater for the changing needs of people and technology.
Similarly, cryptocurrencies are based on blockchain technology, are nothing but computer files written on codes. It requires regular updates to integrate new features and keep it secure from various security threats.
This is where the term hard fork comes into play. The hard fork is nothing but radical changes made to the cryptocurrency’s blockchain protocol to update it to the latest version of the protocol software to make them more stable, secure, and scalable.
How Does a Hard Fork Work?
Hard forks are of two types- contentious and planned.
Contentious Hard Fork
Suppose ABC is a listed company and wants to split up into two separate entities with different management at the helm. Therefore, on separation or split-up, the company’s shares will also get split as per the resolution passed by the board members. For example, for every ten shares, shareholders will receive five shares of the new entity. And, the share price of the old stock will get adjusted by the market on ex-date accordingly.
In a contentious hard fork, something similar happens, but the execution process is entirely different.
Since cryptocurrencies are decentralized, meaning there is no central decision making bodies, all nodes in the blockchain network must agree to the change in the blockchain protocol.
Nodes are miners, developers and all participants engaged in the running of a blockchain network.
However, a complete consensus is challenging to achieve, resulting in the creation of two factions. One faction supports change in the blockchain protocol, and another faction wants to stay with the original version of the blockchain.
The one who wants an update in the blockchain protocol performs a hard fork, resulting in a split in the primary chain. The new chain now operates with the new rules and has its coin. And, the holders of old coins will receive the same amount of new coins for free.
The image shared below will provide you with more clarity,
For example, the BTC fork that created Bitcoin Cash is a contentious hard fork.
Planned Hard Fork
Planned hard forks are mergers of new functions and features into the blockchain. In this method, the creators and developers of the coin are all in agreement beforehand to update the blockchain protocol at a specified date or whenever the update is up for it.
Unlike contentious hard forks, there is no split in the chain in the planned hard fork, as all the nodes agree with the coin’s latest protocol update.
For example, hard forks that happen in the Cardano and Ethereum blockchain at regular intervals are all pre-planned and part of cryptocurrency’s growth roadmap.
History of Bitcoin Hard Fork
Bitcoin XT: The first bitcoin fork was executed in 2014, known as the Bitcoin XT, which included many new features like increased block size. But, due to a lack of user interest, the project was abandoned subsequently.
Bitcoin Classic and Bitcoin Unlimited: In the following years, few forks happened like Bitcoin Classic, Bitcoin Unlimited, which all failed to attract user interest and mark their impact. Bitcoin Classic is still traded in the market and has a market cap of little over $100,000.
Bitcoin Cash: Now, this is the most contentious hard fork in the market, and for the first time, many people in the crypto market got to know the term hard fork. Bitcoin Cash is a result of the Bitcoin fork that happened in August 2017. It increased the block size to 8 MB, compared to 1 MB in Bitcoin, which allowed more transactions per block.
Bitcoin Gold: Unlike other BTC forks, which primarily focused on increasing the block size, Bitcoin Gold focused on restoring the mining functionality with primary GPU and making mining accessible to common people.
Other Major Blockchain Forks
Ethereum Hard Fork: Following a major security scare in the Ethereum blockchain in July 2016, a hard fork was executed in the Ethereum blockchain protocol to cover the vulnerabilities.
Following this, Ethereum moved to the new chain. And, those miners and developers, who were against the hard fork, pledged their support to the old chain, which is now known as Ethereum Classic.
Bitcoin Cash Hard Fork: This is another contentious blockchain fork in the history of crypto that happened in November 2018. Two factions, one led by a mining pool viaBTC and the other faction led by Craig Wright, fought on the technical direction of the coin. With no consensus between the two factions, the Bitcoin Cash hard fork led to the creation of Bitcoin SV (Craig Wright faction).
Do Hard Forks Pose a Risk to the Market?
In comparison to planned hard forks, contentious hard forks pose systematic risks. Here’s are some of the risks posed:
- Contentious hard forks are not smooth and make the market nervous. In case if the hard fork is not managed correctly or conflict escalates between the two factions, it makes the market highly volatile, and the price of the cryptocurrency falls hard.
- For the cryptocurrency community, hard forks are stressful events. During forks, investors tend to move their investment from the coin forked to a safer asset to avoid losses, resulting in a drop in prices.
- If most investors are against the hard fork, they will sell the free coins soon after the fork to buy the old coins, thus pushing its price higher and creating instability in the market.
For instance, the Bitcoin Cash hard fork in Nov 2018 was not well received by investors in the market. The price of both Bitcoin Cash and Bitcoin SV fell significantly soon after the hard fork.
- There also exists a risk of loss of coins during the fork. If a transaction or trade is made while the coin is being forked, it will be lost forever if it moves to the invalid or wrong chain.
Blockchain forks are like a merger and acquisition in the cryptocurrency market. If the market feels the merger or acquisition will help the company, the share price will rise as a mark of approval by shareholders. And, if they think otherwise, the share price will take a considerable beating.
At times, cryptocurrency forks create many issues in the market, but they are needed for the evolution of the market, to fix loopholes, and make it worthy for users.
This was all about cryptocurrency hard forks.
Planning to invest in cryptocurrencies? Download the CoinSwitch Kuber App and start your investing journey at ₹100.
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
Table of content
Subscribe to Our Newsletter with exclusive content.