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Bitcoin Forks: Enhancements and Revolutionary Blockchain Alterations
Discover how Bitcoin forks can drive code enhancements and establish new blockchains like Bitcoin Cash.
Overview
A fork arises when a single blockchain divides into two separate chains. This partition in a blockchain network occurs when an update is applied to the blockchain protocol, but not all network participants, or nodes, consent to its adoption. Two primary types of forks can occur in blockchains — a soft fork or a hard fork. This article delves into the reasons behind forks and specifically, the distinctions between a Bitcoin soft fork and a Bitcoin hard fork.
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What Constitutes a Blockchain Fork?
Understanding blockchain forks requires an examination of the structure and operation of blockchains. Cryptocurrencies are constructed on a groundbreaking technology called blockchain, which operates as a decentralized, public ledger of transactions. When cryptocurrency transactions transpire, they are aggregated into blocks. Subsequently, these blocks are processed, or authenticated, and appended one after the other to the blockchain sequence — thus forming a chain of blocks.
In traditional banking systems, when you transfer funds from your bank account to a friend's account, the bank functions as a central authority, deducting the funds from your account and crediting them to your friend's account, ensuring you have adequate funds for the transaction. In contrast, in blockchain technology, the governing authority is decentralized. Network participants, known as nodes, must independently validate new transaction blocks and reach a consensus within the network regarding the new fund distribution.
Nodes play a crucial role in validating new transactions, ensuring funds are allocated correctly without duplication (double-spending). These nodes are responsible for executing this validation process, which adheres to the network's protocol. Essentially, the Bitcoin network comprises all the decentralized nodes that execute the Bitcoin protocol.
When a protocol undergoes an update, individual nodes upgrade and accept the new modifications. If some nodes reject these changes, a crypto fork occurs. Sometimes, the update is discretionary, and at other times, it is mandatory. A discretionary update is termed a soft fork, while a mandatory update is termed a hard fork.
What Constitutes a Bitcoin Fork?
Network scalability issues offer an excellent illustration of the difference between a Bitcoin soft fork and a Bitcoin hard fork. Around 2015, Bitcoin faced challenges in scaling its transaction capacity to match the rapid expansion of its user base. As more users engaged in bitcoin (BTC) transactions, the network became overwhelmed with escalating transaction volumes, leading to prolonged processing times. There was a concern that if no action was taken to expedite transactions, Bitcoin transactions might take days or even weeks to complete. This sluggish network also necessitated users to pay higher fees to expedite transactions, which was far from ideal and became known as Bitcoin's scalability problem.
One proposed solution to this problem was Segregated Witness (SegWit). SegWit works by separating signature data — proof of cryptocurrency ownership — from Bitcoin transactions and reorganizing this data more efficiently in each block, thus enhancing transaction speeds. SegWit is classified as a soft fork, meaning that it does not disrupt the core functioning of the network.
Since a soft fork involves a non-mandatory update, each network node can decide whether to update its individual protocol copy. In either case, all nodes in the network can continue to interact with one another. For example, rejecting Bitcoin's SegWit update did not result in a new blockchain or a new cryptocurrency (unlike the hard fork that created Bitcoin Cash, which will be discussed later). Nodes that accepted the SegWit protocol update still operate on Bitcoin software compatible with nodes that did not. A soft fork maintains backward compatibility.
In contrast, hard forks occur when the update is fundamentally different from the previous version, rendering the protocol incompatible with older versions. A notable example is the Bitcoin Cash (BCH) hard fork in August 2017. The BCH hard fork aimed to address Bitcoin's scalability problem but took a vastly different approach than SegWit. In 2017, some of Bitcoin's core developers proposed increasing Bitcoin's maximum block size from 1MB to 8MB. However, this 8MB update meant that most nodes, configured and powered to mine a 1MB block size, couldn't promptly or affordably upgrade to mine 8MB blocks. This disparity led to a philosophical divide in the Bitcoin community. Instead of forcing an upgrade to the existing protocol, a hard fork was implemented, leading to the creation of a new cryptocurrency — Bitcoin Cash.
In hard forks, nodes that adopt the update migrate to a new blockchain. The coins on this new blockchain, which are rewarded to successful miners, are distinct and separate from the original ones. When Bitcoin Cash was created, it resulted in a unique Bitcoin Cash blockchain with its own BCH cryptocurrency.
During a hard fork, the blockchain is duplicated entirely before the fork event. This means that holders of the original cryptocurrency receive an equivalent amount of the new cryptocurrency. This is precisely what happened during the Bitcoin Cash hard fork.
Why Do Bitcoin Forks Occur?
Forks can occur unintentionally, but this is rare. An accidental fork arises when two miners mine a block almost simultaneously. This type of fork is resolved once subsequent blocks are added. When one of the two blockchains grows longer than the other, the network abandons the shorter chain, whose blocks become orphaned blocks.
Sometimes, an intentional fork is implemented to rectify or address a protocol's history following a catastrophic bug or hack. For instance, in 2016, a third-party application on the Ethereum blockchain known as The DAO was hacked, resulting in the theft of millions of dollars' worth of ether (ETH). To rectify this hack and return the stolen funds to their original owners, Ethereum developers executed a hard fork. The new ledger, which eliminated the hack and restored the stolen ether, became the primary Ethereum blockchain, while a version of the ledger containing the hack became the Ethereum Classic (ETC) blockchain. Although the majority of users preferred the hack-free version of Ethereum, some users opted to continue using the original ledger in the form of ETC, often due to a strong belief in the immutability of blockchains.
More frequently, intentional forks stem from a community's proactive desire to introduce a new feature or significantly alter or enhance an existing blockchain's functionality. In the case of the Bitcoin Cash hard fork, the primary motivation was to substantially increase the network's transaction verification speed. This objective is reflected in BCH's design, with its enlarged block size and accelerated transaction speeds. All other aspects of Bitcoin's protocol were deemed favorable, so instead of creating a new blockchain from scratch, BCH's creators initiated a hard fork to implement the desired block size changes while retaining BTC's original structure. Similarly, numerous other cryptocurrency projects have originated as hard forks, innovating off the codebase of major cryptocurrencies such as Bitcoin, Ethereum, Dash (itself a Bitcoin fork), and others.
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