Sooner or later, any developing cryptocurrency needs to implement major changes that alter the rules of how it works.
In this article, we will break down what a hard fork is, why it is needed, and what opportunities and risks it can bring to a cryptocurrency.
What is a cryptocurrency hard fork?
Blockchain networks, unlike ordinary software, cannot be updated by pressing a single button. A cryptocurrency, as a decentralised network, runs thanks to nodes – network participants who process transactions in return for a reward. For the network to function properly, all nodes must follow a single protocol, and updating the network requires their full agreement.
In the crypto space, such updates are called forks, which literally translates as ‘a fork’. The concept of a fork means creating a clone of a cryptocurrency based on its source code, taken from open sources. In other words, a fork is a complete copy of a coin that has not been changed.
How a hard fork is carried out
An upgrade takes effect from a заранее announced network block. If nodes accept the hard fork, that block becomes the first block of the new blockchain. If nodes do not want the changes, the hard fork is cancelled and the network simply continues operating.
When a hard fork takes place, a new chain is created, meaning the network splits into two blockchains that are independent of each other. The network with the ‘original’ protocol contains no changes and continues to operate under the old rules. However, all nodes that ensure its operation move away from it completely, making its existence impossible. The second network begins to function under the updated rules.
This situation occurred with the Ethereum Classic fork.
What is the difference between a hard fork and a soft fork?
There are two types of upgrades – hard forks and soft forks. In essence, this corresponds to ‘hard’ and ‘soft’ implementation of changes in the code, but it depends on the specifics of the upgrade.
With a soft fork, updates are introduced without restricting the old protocol from operating. That means nodes that have not switched to the new protocol can continue to keep the network running under the old rules – but only as long as their operation does not violate the rules of the upgraded network.
In the case of a hard fork, the network does not allow operation on the previous version and requires creating a new branch of the blockchain. It must be supported by all network nodes, otherwise it will be cancelled or result in the creation of a new cryptocurrency. A soft fork does not carry this risk, but it cannot enable the network to make fundamental changes.
Planned and controversial forks
Hard forks can be both planned and unplanned.
With planned changes, network nodes are ready to upgrade voluntarily on the announced date, leaving outdated rules behind. In this case, there are usually few dissenters, and even if they remain on the abandoned blockchain branch, its existence becomes impossible due to an insufficient hashrate.
Hard forks that trigger heated debate or occur unexpectedly (as in the case of the hard fork that created Ethereum Classic, which we will discuss later) often lead to a split in the community and, in the end, to two viable networks moving in different directions.
Why is a hard fork needed?
A cryptocurrency hard fork is, first and foremost, an upgrade aimed at improving how the network functions.
A hard fork can be used for purposes such as:
- Fixing network errors – discovered bugs must be addressed, and if old nodes cannot continue operating after the fixes, the network needs a hard fork.
- Adding new features, for example, introducing smart contract support or radically changing how the algorithm works.
Who can initiate a fork?
Many cryptocurrencies, including Bitcoin, are open source, so creating a new chain based on their code is not difficult.
The best-known Bitcoin forks based on its code are Litecoin, which as of March 2024 ranks 22nd among cryptocurrencies, and Dash – ranked 179th.
Initiating a hard fork
Just like a soft fork, anyone can initiate a network hard fork. Typically, the initiator is a well-known figure in the crypto world or an entire community – a development team, a mining pool, or the coin’s community.
In any case, to carry out a hard fork you need to convince as many network participants as possible that it is necessary. Often, a growing split within the community has led to a hard fork and the emergence of a new cryptocurrency.
The best-known coins created as a result of a Bitcoin hard fork are Bitcoin Cash and Bitcoin Gold.
How does a hard fork affect a cryptocurrency’s price?
There is no clearly traceable impact of a completed hard fork on a cryptocurrency’s price. Much depends on its specifics – the reasons for initiating it and the level of acceptance within the community.
A positive mood across the community and important changes that strengthen a coin’s market position can have a positive effect on the price. But this is far from guaranteed. The only point experts generally agree on is that major protocol changes during a hard fork can trigger excessive volatility in the asset.
Advantages and disadvantages of cryptocurrency hard forks
The consequences of a hard fork can have a positive effect on a cryptocurrency’s operation and price, or they can have a negative impact.
Pros of hard forks
- A radical change to the network protocol aimed at the crypto asset’s evolution. If successful, all users fully переходят to the new network. The previous version dies out due to lack of need and the absence of operating nodes.
- Improved network performance and changed operating conditions – higher throughput, revised mining reward rules, and optimisation of node interaction principles.
- Fixing critical errors and improving security protocols.
- Some users view a hard fork as a chance to profit – at the момент of the blockchain split, the number of coins is also duplicated, and if the previous version remains viable, the user can withdraw and sell these coins.
Cons of hard forks
- With major changes, it is difficult to predict how a hard fork will affect the network’s operation and which network will remain the main one. There is always a chance of critical errors that can no longer be fixed by rolling back the system. In that case, network participants will have to choose the previous version of the network – the branch without the upgrade that appeared at the moment of the split.
- A hard fork often becomes a cause of community division into two groups: those for and those against the changes. In this scenario, even if the hard fork is carried out by the majority, the ‘old’ network has every chance to ‘survive’ and continue operating. Naturally, the departure of a large number of network nodes can negatively affect the main cryptocurrency network.
- A hard fork can cause asset volatility, which may lead to losses.
Popular cryptocurrency hard forks
When a hard fork is carried out, the network splits, creating two versions operating under the old and the new protocol. If the old version has enough nodes to keep it operational, it remains and continues under a new name.
Bitcoin hard forks
Over the entire history of Bitcoin, many hard forks have taken place. The very first one launched in mid-2015 to increase network throughput by increasing the block size. The side coin Bitcoin XT did not attract enough miners to remain operational.
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Bitcoin Cash (BCH) – the most successful coin to appear after a Bitcoin hard fork in August 2017. It emerged due to a community split over whether the block size should be increased.
Interestingly, in November 2018 Bitcoin Cash (BCH) itself underwent a hard fork, creating two additional branches – Bitcoin Cash and Bitcoin SV. On 15 November 2020, Bitcoin Cash experienced another hard fork, which led to the appearance of a new chain, Bitcoin Cash Node (BCHN). The old one became known as Bitcoin Cash ABC (BCHA), but later ‘won back’ the familiar name Bitcoin Cash. As of March 2024, BCH has a market capitalisation of $8.7 billion and ranks 20th by market cap on CoinMarketCap, priced at $444.
- Bitcoin Gold (BTG) – this coin also appeared in 2017 on the initiative of a mining pool promoting an upgrade to enable GPU mining under the slogan ‘make Bitcoin decentralised again’. As of March 2024, the coin is priced at $40 and ranks 136th by market capitalisation.
- Bitcoin Diamond (BCD) – historically, Bitcoin hard forks have often taken place under slogans about ‘returning to the roots’. BCD appeared in November 2017, driven by supporters who wanted to ensure full transaction anonymity. Alongside this came increased throughput and a higher number of coins to be issued. In March 2024, BCD is priced at $0.16 and ranks 928th on CoinMarketCap.
Ethereum hard forks
The development history of Ethereum has also seen many hard forks. The first occurred in March 2016, a little less than a year after the blockchain launched. This upgrade stabilised the blockchain and moved it closer to greater decentralisation by removing the canary contracts feature, which allowed developers to reverse users’ actions.
Ethereum Classic
One of the most negative events in Ethereum’s history also happened in 2016. Developers launched an investment project, The DAO, to raise funds via smart contracts within the main network. The smart contract code contained a critical vulnerability that allowed attackers to steal $50 million worth of assets.
The stolen funds, like all other users’ coins, were locked for 28 days, which provided an opportunity to recover them. To return the funds, it was decided to run an unplanned Ethereum hard fork, which ultimately led to a split in the network and the community, and to a new chain of blocks. The result was Ethereum (ETH), while the old chain continued operating as Ethereum Classic (ETC).
In effect, ETC is the original Ethereum envisioned by Vitalik Buterin, while ETH is the дочерний chain that surpassed the original in popularity and functionality.
Byzantium, Constantinople, London and The Merge
Unlike Bitcoin, whose hard forks have repeatedly led to new coins, Ethereum has a more cohesive community.
Over the years, several more successful planned Ethereum hard forks have taken place:
- Byzantium – launched in October 2017, it aimed to optimise network fees, introduce a mechanism for parallel processing of blockchain operations, and postpone the ‘difficulty bomb’ – a mechanism designed to gradually make mining harder.
- Constantinople – after two cancellations, this Ethereum hard fork was carried out in early March 2019. It improved smart contract operation and optimised the virtual machine, reduced miners’ rewards, and again postponed the difficulty bomb.
- London – an Ethereum network hard fork carried out in early August 2021 that completely changed how miners’ rewards were начислены. After the upgrade, each block has a fixed fee, part of which is automatically burned, helping to curb inflation.
All these hard forks, including softer upgrades such as Altair, prepared Ethereum for a new era known as Ethereum 2.0.
- On 15 September 2022, the Paris hard fork, also known as The Merge, took place. It marked the отключение of proof-of-work mining and Ethereum’s переход to proof-of-stake.
Cardano hard forks
Cardano, the first so-called ‘third-generation’ cryptocurrency and the sixth-largest by market capitalisation, has long attracted investors with a well-developed roadmap – but above all, with the commitment to follow it without delay. ADA hard forks never lead to the creation of a new coin due to a special system that combines old and new blocks.
- Shelley – the first major upgrade for the Cardano network. It was activated in July 2020 and was aimed at full decentralisation and enabling staking. From that point, the network moved to the Ouroboros consensus algorithm.
- Mary – a Cardano hard fork that enabled users to create their own tokens without using smart contracts, launched in March 2021.
- Alonzo – the last major upgrade that brought the cryptocurrency into the Goguen era took place in September 2021. With its launch, smart contracts finally became available on the network, enabling decentralised applications to be built.
- Vasil – a protocol upgrade implemented in June 2022, introducing five key mechanisms to improve blockchain performance. These improvements enhanced usability and scalability by increasing block size and allowing more transactions per block.
It became more convenient for developers to work with the Cardano blockchain thanks to the significantly reduced complexity of creating and deploying dApps.
Conclusion
Hard forks can lead to unexpected outcomes for a cryptocurrency: a split in the community and the creation of a competing coin. However, their goal – the development and improvement of technology – is more important than any risks.
