If you’re involved in cryptocurrencies, you’ve probably heard of something called a “fork.” But what exactly is a hard fork? Before we look at what a hard fork is, you must understand how a blockchcain works. This video uses Bitcoin as the primary example, but all these concepts apply to other cryptocurrencies as well.
Bitcoin is a digital currency and that means that it’s implemented with a lot of software. This software is called the Bitcoin protocol, which establishes the rules to which everyone agrees upon who uses Bitcoin. This includes how large a block is, what rewards miners get, how fees are calculated, etc.
But just like any software project, development on Bitcoin will never be finished. There is always room for improvement. The Bitcoin developers regularly push out updates to fix issue’s or to increase performance. Some of these improvements are small but others fundamentally change the way Bitcoin works.
Sometimes a group of developers disagree with the direction that Bitcoin is taking. The miners can also disagree because updates to the Bitcoin protocol can reduce their profits. If a group of people are so dissatisfied they can choose to go their own way and create their own version of the protocol and fork the blockchain.
So what happens if they do this?
Bitcoin consists of two big pieces: the Bitcoin protocol and the blockchain which stores all the transactions that have happened. If they decide to create their own fork, they start by copying the Bitcoin protocol code and start making their changes. They can do this because Bitcoin is completely open source. After they have implemented their desired changes, they define a point in time at which their fork will become active.
Some people decide to support the original protocol while others want to support the fork. Each group then starts adding new blocks to the fork that they want to support. At this point, both blockchains are incompatible with each other. Because a fork is based on the original blockchain, all transactions that happened on the original blockchain, also happened on the fork. And that means that if you had a certain amount of coins before the fork, you will also get the same amount of the new currency. Some people call this free money, but it all depends on whether or not the fork can attract actual value.
There are two kinds of forks: a hard fork and a soft fork. A hard fork occurs when someone forks a cryptocurrency and makes it incompatible with the original. If you, however, fork a cryptocurrency and make your changes compatible, then we call it a soft fork.