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What is a hard fork?

A hard fork is a step that is sometimes needed if a network is planning to launch a significant upgrade. Many people got used to it because it became common for many different projects to evolve their blockchains using hard forks. One recent event was the hard fork of Cardano to launch the Alonzo upgrade. Everything went well, and ever since the hard fork, smart contract capabilities became available on Cardano’s blockchain. Another famous example is Monero, which is undertaking hard forks on a more or less regular basis to upgrade its blockchain.

But not all hard forks are planned or benign. In this article, we like to dig a little deeper, explain the basics, and invite you to a journey giving historical examples of hard forks.

A hard fork is a radical change

Hard forks are meant to change a network and the underlying blockchain. The changes are so drastic that all network participants have to update the software. A soft fork, however, is often used for much smaller changes. A hard fork is often used to change vital features of a blockchains protocol. In some cases, this might be an upgrade like the one we explained above. But in other cases, it might be used to create a different cryptocurrency.

One recent example is the split between BTC and BCH. During 2017, it became clear that a fraction of the Bitcoin community was unhappy about the turn of events in Bitcoin’s development. They were looking to solve the scalability problem using bigger blocks instead of other solutions like SegWit or the Lightning Network. Since this group had enough supporters, they simply forked the Bitcoin blockchain.

The result was the creation of Bitcoin Cash (BCH). The BCH blockchain effectively used a different protocol, but users were not forced to choose a side. Instead, the BCH developers created a snapshot of the network, meaning that everybody who held Bitcoin (BTC) during that time was also granted the same amount of Bitcoin Cash (BCH).

How does it work?

During the hard fork, the nodes running the new software won’t accept the old version of the blockchain. The result is one old version of the blockchain and a new one. If the hard fork is part of an upgrade, it usually has consensus in the network, meaning that most nodes will upgrade asap or at least in a short amount of time.

But if the fork is commenced without consensus, the network is risking a split. This can be particularly dangerous if both parties claim to run the correct version of the protocol. In case of dispute, the longest blockchain is considered to be the rightful successor. Ironically, such a scenario happened in late 2020 to Bitcoin Cash because a part of the community favoured a developer fee that was supposed to be deducted from the block reward.

Since the miners were needed for consensus, the new blockchain became the shorter chain and was rejected. Why should the miners choose to share after all?

Is a hard fork dangerous?

If it is used as a method to upgrade the network with consensus in the community, no. However, you should refrain from making transactions during the event and wait until the developers give the all-clear signal and announce that the hard fork has been successfully commenced.

However, in a scenario where one part of the community uses a hard fork to force the rest to accept a new version of the protocol, things can change drastically. Undertaking transactions during that time can be potentially harmful because one of the two blockchains will lose. If the transaction is not supported on the winning blockchain, this can lead to a disastrous outcome for users.

This is one of the reasons why such hard forks can create a price drop because investors and traders often avoid uncertainty during the transition.

Other reasons for a hard fork

A hard fork is not only needed for a drastic change in the future of a blockchain. It can also reverse the past. One of the best and biggest examples is the so-called DAO hack in Ethereum’s history. The hack caused a massive loss to many investors, effectively leaving the Ethereum developers with a choice.

They could accept that the hacker got away with his crime, or reverse all transactions. The DAO hack became a twofold turning point for Ethereum. While the blockchain was set back using a hard fork, the decision also created a new cryptocurrency.

A part of the community was not happy with the decision and created Ethereum Classic (ETC) using the old chain with the results of the DAO hack still in place. Such a rollback is very rare since it is a principle of cryptocurrencies that all transactions are final.

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