Guide to Forks: What are Hard Forks and Soft Forks, and is the money really free?

Glancing at the headlines of any cryptocurrency news, one might notice ads or articles that claim how you can get free coins from your investments. Free coins, or forked coins, sound enticing enough. Forks, from which forked coins are doled out from, are stubborn issues.

What is a fork in the first place?

Hold up. Before diving headfirst into forks, we need to understand the technology behind Bitcoin. Bitcoin is a decentralized peer to peer payment network. Software protocols that run Bitcoin are made up of codes that define the rules for the network. Since Bitcoin’s software is open-sourced, it is crucial to note that anyone can look at the underlying codes and replicate it.

The underlying technology behind Bitcoin, known as the blockchain, is a ledger of transactions that grow continuously to form a single chain of blocks. Participants in the network have to agree on a unified set of rules to validate the transactions. This consensus forms the core of the currency’s decentralization.

A fork happens when there is a split within the blockchain. Cryptocurrencies are software, and forks are modifications to the underlying code in the software.

Why do forks happen?

Forks take place due to a change in the underlying protocol rules. This happens when groups in the Bitcoin community have different views on regulating the network. When two parties disagree with each other, this creates a fundamental problem since everyone has to be in unity with the rules of the network. Hence, a fork takes place, with usually the smaller group in the community being in control of a different type of cryptocurrency. There are two types of forks that usually occur:

Soft forks
Hard forks

Soft Forks

Soft forks are known to be software upgrades that are “backward compatible” with older versions of the cryptocurrency. Participants in the network that did not upgrade their software to the latest version would still be allowed to validate and verify transactions. However, the nodes on the blockchain of these participants will be rejected by upgraded nodes if they continue to mine blocks, thus affecting their functionality. Soft forks require the majority of hash power in the network to succeed, or else it risks getting abandoned in the network.

source: https://www.investopedia.com/terms/s/soft-fork.asp

Soft forks are a temporary divergence in the blockchain, caused by non-upgraded nodes that are not following new consensus rules. An example of a soft fork that happened in Bitcoin was Bitcoin Improvement Proposal 66(BIP66) in 2015.

BIP66 was a soft fork that occurred in July 2015. Its primary purpose was to make signature validation rules stricter. When this fork was deployed, 95% of the hash power in the network stated they would change their block version from 2 to 3. This meant that miners would deem version 2 blocks invalid and only mine on version 3 blocks. A small percentage of miners, around 5% of the network, did not update their block version. If one of them had solved a version 2 block, that block would be ignored and replaced with a version 3 block. This was done with the assumption that everyone had been verifying the transactions that had taken place as well as the transactions within the block.

Post-fork, miners like Antminer and F2Pool were creating version 3 blocks. However, neither validated the previous blocks. Without verifying the transactions in it, these miners started mining new blocks that referenced invalid block headers. Miners sometimes monitor other pools to see if they solved a block. This is so that they can work on new ones as soon as possible. F2Pool and Antminer heard that another pool, BTCNuggets, solved a block. Without knowing that the block was invalid, they immediately started mining it. This resulted in a six-block fork that was resolved after contacting the owners of the affected mining pools.

Hard forks

Hard forks are software upgrades that are not software compatible. A hard fork is a permanent split from the old chain which creates two chains. An indelible divergence of the blockchain happens as a result of this separation, requiring everyone in the network to upgrade their software or be left behind in the old chain. On many occasions, both chains continue to be adopted, resulting in a second cryptocurrency being created. Hard forks can be either planned or contentious.

The main difference between hard forks and soft forks is that changes made in hard forks are permanent. Such changes mean that users are required to upgrade their nodes to continue utilizing the cryptocurrency. However, for soft forks, the changes made are reversible, and users can still utilize the network. However, they can’t mine on updated blocks in the network.

Planned hard forks

Planned hard forks are protocol upgrades that have already been slotted in the project’s roadmap from the start. The enhancement of the blockchain’s capabilities would naturally result in the new chain being utilized by the community, spearheaded by the core developers. Old chains will be abandoned since there isn’t any reason to support it.

A major hard fork that was planned for in October 2017 was Ethereum’s Byzantium. This was the first phase of Ethereum’s 2 phase upgrading plan. The planned upgrade for Ethereum meant to address scalability issues and integrate private transactions. Another major fork occurred in January 2017 when Monero hard forked to implement a feature known as Ring Confidential Transactions(RCT) to improve security and privacy.

Contentious hard forks

Contentious hard forks occur when disagreements happen within the community. This results in a smaller group creating a new chain by making significant changes to the code, which is precisely what happened in the case of Bitcoin Cash.

A faction of the community wanted Bitcoin to increase its block size from 1MB to 8MB. This was to allow Bitcoin to scale better, which allows for more processed transactions. This reduces the user’s payment fees, which in turn minimizes the bottleneck of Bitcoin’s network. However, this proved to be contentious because smaller miners would have problems competing for blocks on the proposed bitcoin blockchain effectively. This would be unfair as it leaves more power in the hands of larger miners. In the end, this faction hard forked and created Bitcoin Cash.

Another example of a major hard fork that happened was Ethereum classic(ETC). ETC was a response to efforts to reverse the effects of a hack that took place in one of their applications, the Decentralized Autonomous Organization(DAO).

Most members of the community, including those in the core development team, chose to hard fork to reverse the effects of the back. However, a small portion of the community was heavily opposed to any change in the blockchain. This was because they were philosophically adamant to any fundamental change to the codes of the underlying software. As a result, the smaller group intentionally stayed behind, did not make any upgrades to the software and continued to mine the blockchain that is now known as ETC. The majority of the Ethereum community went ahead as the developers undid the impact of the hack. Additionally, they held onto the name “Ethereum” on a partially rolled back blockchain that did not have the initial effects of the hack.

Segwit2x was an extremely controversial hard fork that drew a sharp divide within the Bitcoin community. The main issue lied in the solutions that were proposed to fix scalability problems that Bitcoin was facing. Bitcoin’s 1MB block size prevented the number of transactions to increase, causing higher fees and longer confirmation times. The solution proposed was to increase the limit to 2MB, which needed a change in the protocol to occur. This change would require a hard fork to take place.

Many in the community felt that Segwit2x was led by a small division of ‘elites’ that did not represent the views of the entire community. This went against the fundamental principles of what Bitcoin was built on – true decentralization. In the end, Segwit2x did not occur, and the hard fork was cancelled by the developers when most of the people withdrew their support in the community.

Bitcoin Gold

Among contentious forks, Bitcoin Gold is one of the most well known. The infamous hard fork of Bitcoin was meant to reverse the paradigm surrounding mining the blockchain and restore the GPU mining functionality. Huge companies with large banks of mining computers are currently mining large chunks of Bitcoin. This, according to the developers, has led to the Bitcoin blockchain becoming too centralized. Currently, these large companies are utilizing Application Specific Integrated Circuit(ASIC) hardware to mine Bitcoin, which is a million times faster than an average CPU. Having more processing power means having a greater influence over the Bitcoin network, going against the core principle of decentralization.

The goal of Bitcoin Gold was to create a network that anyone can mine using basic hardware. This was to create a level playing field for anyone mining Bitcoin using CPUs and GPUs.

Free Coins from hard forks

Free coins!? Yes, Hard forks are routinely embraced by the community because of the entitlement to free coins. When the old chain duplicates, those who were holders of the old chain will get new coins from the new chain.

Claiming your forked coins

Before you claim anything, make sure your Bitcoin is on a platform that supports the fork before the snapshot occurs.

If private keys are in your control: You will need to import a copy of your bitcoin keys and set up the wallet of your forked coin.

If your wallet provides support for forked coins: The wallet will have instructions that you can follow to configure to include the new forked coin.

If you’re on an exchange wallet like Kraken: Make sure the exchange supports the fork; if not, find one that does. Then wait for them to credit the coins in your account.

If you are claiming forked coins from networks like Ethereum, you only need to configure your existing Ethereum wallet to load the new token. The reason why it is much simpler is because a copy of the existing ledger is being made in the form of a token. Additionally, this token is created on the existing network itself.

Is the money really free?

The problem with getting free coins lies in 2 main issues.

Whether the coin exchange supports the fork
The possession of the coin before the block height at which the fork occurred

The developers of a given fork will take a “snapshot” of the ledger (a public record of every wallet balance) at a given block height. This creates another copy of the chain (the result being that all holders of Bitcoin on one chain will hold an equal ratio of the new coin on the new chain). That duplicate will become the new chain after it goes live. After the forked blockchain goes live down the road, which can take hours, days or months, you can claim your “forked coins.”

When there is a known fork or airdrop coming up, demand causes the price to skyrocket. However, as soon as the fork is deployed, the prices tend to plummet when everyone has gotten their slice of the pie. If you’re out to make a quick buck, keep up to date with news of upcoming forks, and make sure you exit as early as possible.

Platforms that support Bitcoin forks include third-party Bitcoin wallets, exchanges like Binance with an excellent record of supporting forks, and wallets that give you direct control of your private keys(for example, Bitcoin Core). Other third-party wallet and exchanges like Coinbase and Trezor may or may not support a given fork.

Being an integral part of the ever-evolving landscape of cryptocurrency, forks allow cryptocurrencies to update protocols and be flexible when the need arises. Overall, forks are a good way of regulating the network and understanding the needs of the users in the community so changes can be implemented as problems come up.

Post Views: 6,379