Discover the Key Differences Between Soft and Hard Forks

In September 2022, Ethereum underwent the most transformative upgrade in its history. The Beacon Chain upgrade wasn’t just a routine update—it completely redefined the network’s foundation. Ethereum abandoned its Proof of Work (PoW) consensus mechanism, the same energy-intensive protocol Bitcoin still uses, in favor of the greener and more scalable Proof of Stake (PoS). Overnight, the expensive mining rigs Ethereum validators had relied on became obsolete. To stay in the game, validators were now required to stake 32 ETH, marking a fundamental shift in how Ethereum operates.

The change was non-negotiable. Validators who refused to update their nodes were effectively locked out of Ethereum’s mainnet consensus. Ethereum had embraced a hard fork – a mandatory upgrade that every node had to comply with to stay connected to the network.

Bitcoin had its own historic moment in November 2021 with the Taproot upgrade. This upgrade introduced powerful new capabilities, enhancing privacy and paving the way for innovations like Ordinals. Yet, unlike Ethereum’s Beacon Chain upgrade, Taproot wasn’t mandatory. Bitcoin validators could opt out and continue participating in the network’s PoW consensus. The tradeoff? They missed out on the benefits Taproot offered, like verifying Taproot-enabled transactions. This was a textbook soft fork—an upgrade that allows non-upgraded nodes to coexist with those running the new rules.

The upgrades to Ethereum and Bitcoin showcase two different approaches to evolving a blockchain. These are the central themes of this article: hard forks and soft forks—what they are, how they work, and how they shape the networks we rely on.

The main difference between a hard and soft fork is backward compatibility. Soft forks are backward compatible, allowing continued participation while adopting new rules. Hard forks are not, requiring immediate updates due to rule contradictions.

Understanding these concepts is more than just learning technical jargon. Blockchain upgrades can significantly impact a network’s functionality and future value. By the end of this piece, you’ll not only grasp the mechanics of hard and soft forks but also gain insights into how these changes can guide your investment decisions and reshape the blockchain landscape.

What are Forks in Blockchain?

A defining feature of blockchain technology is its open-source nature—anyone can view, copy, and modify its code. This transparency and accessibility uphold the Web3 principles of permissionlessness and transparency, enabling developers worldwide to contribute to or innovate upon existing blockchain projects.

So, what exactly are forks? Simply put, blockchain forks refer to copying the codebase to create a new piece of software or network, and this happens all the time. A blockchain's open-source code allows networks and even decentralized applications (DApps) to be forked. Developers can copy smart contract code, tweak it to suit specific needs, and launch entirely new DApps. For instance, the Uniswap V2 liquidity pool contracts have become the blueprint for countless DEXs, such as SushiSwap, which started as a direct fork of Uniswap.

Similarly, chains themselves are forked. Take Litecoin, for example—a fork of Bitcoin that made slight modifications to create a faster, more transaction-friendly blockchain. These forks are a natural byproduct of blockchain’s open innovation ethos, where anyone with coding skills and a vision can build on or customize what already exists.

Updating Blockchains: A Fork in Action

Blockchains are software, and just like any other software, they must be updated periodically. Updates could improve performance, add new features, or address vulnerabilities. In blockchain, this process is also called a fork.

To better understand, think of a blockchain as software that runs on a distributed network of full nodes (computers). These nodes communicate with one another to maintain the network’s operations. Updating a blockchain means updating the software that runs on these individual nodes.

Why Do Forks Matter?

Forks are at the heart of blockchain’s adaptability and growth. Without them, blockchains would stagnate and fail to evolve in response to new challenges or opportunities. Whether it’s improving scalability, enabling new features, or creating new networks, forks allow developers and communities to shape the future of blockchain technology.

Upgrading a blockchain’s functionality via forking results in hard forks or soft forks. Whether a fork is ‘hard’ or ‘soft’ depends on the node’s mandate to accept the changes and update their local codebase. As mentioned earlier, Web3 is a permissionless economy, meaning no one can force a node to upgrade, but accepting or denying an update can have repercussions.

What is a Soft Fork?

When developers fork a blockchain to add new rules or update existing ones but do so in a backward-compatible way, it’s known as a soft fork. A soft fork ensures that any transaction valid under the new rules is also valid under the old rules. This backward compatibility allows nodes that haven’t updated their software to continue participating in the network’s consensus, verifying transactions, and even producing blocks.

A fork is backward compatible when it doesn’t override existing rules. A node not updated with a soft fork doesn’t “know” what the new rules are, but it doesn't affect its ability to participate in the network because a transaction valid based on old rules is also valid after the updated rules.

Two of Bitcoin’s most notable soft forks are SegWit (Segregated Witness) and Taproot:

• SegWit introduced a new class of Bitcoin addresses called Bech32, which improved transaction efficiency by separating signature data from transaction data. Importantly, it didn’t invalidate the older P2SH addresses, allowing the network to operate smoothly despite some nodes not updating.
• Taproot improved Bitcoin’s transaction efficiency further by aggregating multiple digital signatures into one. This made transactions cheaper and more private but didn’t render the older, separate signature method invalid.

Let’s break this down with an example. Imagine updating your phone’s messaging app to support new emojis. Even if your friend hasn’t updated their app, they can still receive your messages—they just won’t see the new emojis. Similarly, a blockchain’s soft fork lets older nodes function alongside updated ones, though they miss out on some new features.

What If a Validator Refuses to Update to a Soft Fork?

What happens if a validator decides not to update its node after a soft fork? Technically, it can still operate on the network, validating transactions, producing blocks, and participating in consensus. However, it would miss out on the advantages of the soft fork, which could impact its profitability and efficiency.

For instance:

• Higher Costs: Taproot improved transaction efficiency, reducing the cost of processing transactions. Validators running outdated nodes wouldn’t recognize these improvements and incur higher transaction processing costs.
• Reduced Functionality: Using advanced scripts, Taproot introduced greater programmability and functionality for Bitcoin transactions. Older nodes wouldn’t recognize these Taproot-enabled transactions and would have to rely on updated nodes for verification. This reliance undermines the network’s decentralization and permissionlessness.

While soft forks don’t mandate immediate action from nodes, there’s a clear incentive to update. Validators who fail to upgrade risk missing these benefits and contributing to a weaker network security model, as their reliance on other nodes for verification introduces potential vulnerabilities.

Ultimately, soft forks provide a graceful way to upgrade a blockchain, giving validators time to adapt without halting the network. While optional, most validators adopt these updates to stay profitable and contribute to the network’s long-term security and functionality.

What is a Hard Fork?

A hard fork represents a non-backward-compatible update to a blockchain protocol. This means that blocks produced under the new rules are invalid under the old rules, and vice versa. Hard forks introduce changes that fundamentally contradict the previous rules, requiring all nodes to update their local code to remain part of the network. Failure to update immediately disqualifies a node from participating in consensus or producing valid blocks.

How Hard Forks Work

When a blockchain undergoes a hard fork:

• Nodes must update: Nodes that do not update their local code become incompatible with the rest of the network. They cannot verify transactions, produce blocks, or participate in consensus.
• Data becomes obsolete: Any assets stored in wallets, smart contracts, or blockchain history maintained by non-updated nodes become invalid and worthless under the new protocol.
• Resynchronization: Updated nodes sync with the new protocol through a snapshot of the last valid block under the old rules. This ensures continuity by granting updated nodes a copy of their assets and data in the new network based on that snapshot.

For example, in September 2022, during Ethereum’s Beacon Chain upgrade, the network transitioned from Proof of Work to Proof of Stake. Every validator who updated their node to the new protocol received a copy of ETH based on the final block state under the old system. Validators who failed to update were effectively locked out of the network, rendering their data and assets unusable.

When Hard Forks Cause Network Splits

Hard forks are usually implemented after extensive research, testing, and discussion within the blockchain community. However, when consensus cannot be reached, a hard fork can result in a network split, leading to two separate blockchains.

Here’s how this happens:

1. Community division: A hard fork is proposed to address critical issues or introduce foundational changes. However, consensus may not be achieved if the community is divided on the proposal.
2. Longest chain rule: Blockchains operate under the "longest chain rule," where the chain with the most final blocks becomes canonical.
3. Fork implementation: Some nodes comply and update their code when the hard fork goes live, while others refuse.
4. Canonical chain formation: Most nodes that comply form the longest chain, making it the recognized blockchain. Updated nodes receive new tokens equivalent to their old balances.
5. Separate branch creation: Non-updated nodes consider the new chain invalid. They continue to produce blocks based on the old rules, creating a separate branch. On this chain, the assets of updated nodes are considered worthless, and vice versa.

This process results in a split network, with two blockchains operating independently.

Bitcoin Cash (BCH): A Case Study

A notable example of a network split occurred in 2017, when the Bitcoin community proposed changes to improve scalability. Some developers and miners advocated for larger block sizes to handle more transactions, while others supported maintaining Bitcoin’s original design with smaller blocks. The disagreement led to a hard fork, which created Bitcoin Cash (BCH). Bitcoin continued its original rules, while BCH implemented larger blocks to increase transaction capacity.

A Hard Fork Doesn’t Always Mean a Split

Network splits are not inevitable. When the community overwhelmingly agrees on a hard fork, virtually every node updates its software, preventing any division. For example, Ethereum’s Beacon Chain upgrade was implemented without a network split, as the community reached a consensus about the transition to Proof of Stake.

In summary, while hard forks are powerful tools for implementing significant changes to a blockchain, their outcome depends on community alignment. When consensus is strong, hard forks strengthen the network without fragmentation.

Key Differences Between Soft Forks and Hard Forks

The main difference between a hard and a soft fork is backward compatibility. The new rules under a soft fork do not contradict the old rules, giving participants time to implement the soft fork while they continue participating in the network. In contrast, a hard fork is non-backward compatible; the new rules contradict the old ones and demand an immediate update.

The following table summarizes the key differences between the two fork types:

The Role of Forks in Blockchain Evolution

Forks are at the heart of blockchain innovation, pivotal in adapting networks to meet the industry's ever-evolving demands. Through minor tweaks or groundbreaking changes, forks enable developers to address existing challenges, introduce new features, and keep blockchain networks relevant and secure.

Driving Innovation and Problem Solving

Blockchain networks face challenges such as scalability issues, high transaction fees, and evolving security threats. Forks allow developers to implement updates that tackle these problems:

• Improved Scalability: Bitcoin Cash (BCH), a hard fork of Bitcoin, introduced larger block sizes to process more transactions per block, addressing Bitcoin’s scalability limitations.
• Enhanced Privacy: Bitcoin’s Taproot upgrade, a soft fork, improved transaction privacy by aggregating digital signatures, making transactions less distinguishable.
• Consensus Mechanism Shifts: Ethereum’s hard fork to implement the Beacon Chain transitioned the network from Proof of Work (PoW) to Proof of Stake (PoS), drastically improving energy efficiency and scalability.

Forks also foster innovation by providing developers with the freedom to experiment. Open-source blockchain networks encourage forking to create new blockchains tailored to specific use cases. For instance, Litecoin, a fork of Bitcoin, adjusted parameters like block time and hashing algorithms to create a faster and lighter alternative to Bitcoin.

Forks and Cryptocurrency Governance

Forks are also a manifestation of cryptocurrency governance, showcasing how communities resolve disagreements and make collective decisions. In decentralized systems, no central authority dictates the network's future—forks act as a democratic mechanism for change.

• Soft Forks in Governance: Soft forks offer an incremental approach to implementing updates, minimizing disruption. They enable consensus-driven changes where validators can adopt new rules while still operating on the network.
• Hard Forks in Disputes: When disagreements over protocol changes arise, hard forks serve as a way to resolve conflicts. For instance, the infamous split between Ethereum and Ethereum Classic followed the DAO hack in 2016. The Ethereum community opted for a hard fork to reverse the hack’s effects, while Ethereum Classic preserved the original chain, demonstrating the governance flexibility forks provide.

Forks also empower blockchain communities by ensuring decentralized governance. Decisions to implement forks often involve extensive discussions, testing, and voting among stakeholders, including developers, miners, and users. This ensures that updates align with the community’s broader vision for the network.

In conclusion, forks are indispensable tools for blockchain evolution. They enable networks to adapt, innovate, and grow while serving as decentralized decision-making mechanisms. Through forks, blockchain communities can overcome challenges, introduce groundbreaking features, and chart new paths for the future of cryptocurrency.

Final Thoughts

Understanding blockchain forks is crucial for anyone invested in cryptocurrency. Hard forks and soft forks aren't just technical upgrades; they can significantly impact the functionality, security, and value of the networks tied to your tokens. Staying informed about upcoming forks for the blockchains you’re invested in ensures that you’re not blindsided by changes that could affect your holdings, whether it's improved scalability, new features, or even potential network splits.

You can make more informed investment decisions by keeping up to date with blockchain forks. Whether assessing how a hard fork might influence token value or evaluating the benefits of a soft fork on transaction efficiency, this knowledge empowers you to navigate the rapidly evolving crypto landscape with confidence. Forks are more than just updates—they’re opportunities to understand the direction of a blockchain and position your investments wisely.