What is a hard fork?

20.05.2022

Intermediate

#hardfork #Technical Updates

Key points

A hard fork is a way to make significant changes to a blockchain protocol’s code. The term comes from the English word “fork”.
A hard fork is also a means for the community to reach consensus on proposed changes.
Hard forks are sometimes used to launch new crypto projects.

Why have a hard fork?

Every blockchain runs on a protocol—an application composed of various components. The code of most popular blockchain projects is open source. This means it is published in full and can be freely copied.

Blockchain protocol code is continually refined: bugs and vulnerabilities are removed and improvements added. Some changes can be substantial. In such cases developers create a hard fork: rather than altering the current protocol, they make a parallel copy and add new code to it. Validators or operators of Bitcoin nodes then migrate to the new version of the protocol—if they agree with the changes.

This approach preserves the blockchain’s stability, since the current protocol remains unchanged and is not exposed to upgrade risks.

Hard forks are used for major upgrades, but they can also resolve crises. For example, after The DAO was hacked in 2016, Ethereum developers used a hard fork to “return” to owners funds worth about $55m that had been stolen—a very significant sum for the crypto industry at the time.

Who invented the hard fork?

Forks are widely used in software development. Most source-code libraries are managed with Git, the world’s most popular version-control system. It allows developers to create copies of a current library (branches of the original). Thanks to this, they can test changes needed in the main library without risking “breaking” it. The copy retains a link to the parent branch.

As development progresses, new branches often grow from the original library, and these can in turn be copied. The application’s change history thus takes a tree-like form, resembling the tines of a fork with a single handle (hence the name).

Much the same happens with a blockchain protocol.

Who takes part in a hard fork?

Typically a hard fork follows lengthy discussion and consensus within a project’s community. Developers first propose a change. It is debated, refined and tested, and finally released.

If the upgrade is major and involves not only technical changes but also, say, tokenomics, debate can extend beyond developers. In Bitcoin there is a formal system for protocol-improvement proposals called Bitcoin Improvement Proposal (BIP). Developers of Ethereum follow a similar approach.

To activate a hard fork, writing new code is not enough; approval from most other participants is required. Besides developers, the other key constituency is validators who run the network’s nodes. The blockchain’s stable, healthy operation—and thus the whole project—depends on them.

Validators know what blockchain users need and can voice opinions on proposed changes. If they do not support an upgrade, they simply will not switch their nodes.

Crucially, a genuine blockchain protocol cannot be updated unilaterally, without the community’s consent, because decentralisation applies not only to the network but also to its software layer.

The Terra episode illustrated this. After the dramatic collapse of the UST stablecoin and the LUNA native cryptocurrency, the project’s founder, Do Kwon, proposed issuing a new digital currency via a hard fork. In his view it could be used to compensate holders of the devalued coins. Many in the Terra community disagreed.

How do new blockchain projects emerge from hard forks?

If most nodes support a hard fork, the network migrates to the new version. In PoW blockchains such as Bitcoin, miners must also signal readiness to adopt the upgrade.

But sometimes a hard fork splits the community: some nodes support the upgrade while others do not. The blockchain can then divide into two chains: one runs with the upgrade, the other continues the old branch, adding its own changes.

This is what happened after The DAO hack: most supported Vitalik Buterin’s proposal to compensate victims via a hard fork, but part of the community disagreed. The result was Ethereum Classic.

A similar episode occurred with Bitcoin: differing views on scaling the first cryptocurrency via protocol changes led some developers and miners in 2017 to form the Bitcoin Cash project.

Projects whose code has been copied from another protocol are also called forks. That is how SushiSwap appeared, whose creators made only minor edits to the source code of the Uniswap decentralised exchange.

How does a hard fork affect a cryptocurrency’s price?

Events of this kind almost always affect prices. If a hard fork is meant to resolve major issues, enjoys consensus and is anticipated by the community, the network’s native asset will probably rise.

But if a hard fork splits the community, fails to advance the project or does not go to plan, the native cryptocurrency may well lose value. Most often that reflects investors’ doubts about the blockchain’s prospects.

Either way, a hard fork introduces uncertainty.

How does a soft fork differ from a hard fork?

If a hard fork is a “hard” upgrade that requires moving to a new branch, a soft fork is a “soft”, usually minor change that does not require restarting the network on a new protocol.