What is a blockchain fork?

Learning outcomes:

By the end of this article, you will understand: 

1. The definition of a fork 
2. Why forks are fundamental to open, permissionless blockchains 
3. What a soft fork is and its implications 
4. What a hard fork is and its implications 

What is a fork?

A fork occurs when a blockchain splits into two competing paths. The cause of forks can vary. Sometimes, we see an unintentional creation of competing blocks, resulting in a temporary split in a blockchain. But forks can also be intentional upgrades to the rules that govern the creation of new blocks.

Where there is an agreement on the change of rules, intentional blockchain forks function like a software upgrade to your internet browser or PC operating system. This is known as a soft fork.

Where there is disagreement on the rules change, the blockchain splits into two distinct competing chains from that point forward, with each following its own implementation. The result: two separate cryptocurrencies (old and new). This is called a hard fork.

Unintentional forks: orphan, uncle & stale blocks

There are numerous blockchain consensus mechanisms, but the common characteristic is a pseudo-random selection process to decide how a new block of transactions gets added to the historical chain.

The quirks of that selection process can sometimes produce two new blocks, instead of one, unintentionally creating competing versions of the blockchain:

Orphan/stale blocks – Created when two Miners submit valid new blocks at the same time. This results in two competing chains until one is discarded by the majority of Nodes.

Uncle blocks – In pre-Merge Ethereum, two blocks might be mined at the same time, with the block demonstrating greater PoW added to the chain. Post-Merge under PoS, block proposers are pre-selected, removing this quirk.

What is a soft fork? 

A soft fork results from a backwards-compatible intentional change to a blockchain’s consensus mechanism. The change might be fixing a security vulnerability, improving existing functionality, or adding a new feature.

Soft forks can be compared to updating your internet browser or PC operating system. Nodes are not obligated to update their client software, but failure to do so means that they can no longer act as a Miner/Validator, proposing new blocks and earning rewards.

Backwards compatibility means that soft forks don’t split a chain, as the old and new rules are compatible with the system function. You can compare this with running an old operating system on your smartphone; it still works but doesn’t benefit from the changes.

Soft forks & improvement proposals 

Nodes run client software that reflects the blockchain's operational rules, described as its protocol. The open nature of blockchains extends to their open-source protocols, allowing anyone to suggest a big fix, smaller change or feature upgrade.

Using Bitcoin as an example, the protocol change control process is designed to be democratic. The process allows for community-based change decisions that enable the system to grow while improving its functionality and security. 

New changes are submitted in numbered Bitcoin Improvement Proposals (BIPs), the first of which set out a standard for submitting BIPs in 2011. 

You can see a full list of BIPs on Github with soft forks indicated in brackets, but here’s a selection of some of the most important:

Segregated Witness (BIP 141) – Improving scalability by allowing more transactions to fit into a single block.

Taproot (BIP 340-342) - Improving privacy and efficiency; enabling smart contracts

So long as everyone agrees on BIP acceptance or rejection, the community and blockchain move forward. 

But this open and democratic approach to change allows anyone who feels strongly enough about a specific development to split off and create their own new community/system, much like political parties split when they cannot agree on a key policy difference. This is known as a hard fork.

What is a hard fork?

A hard blockchain fork results from the intentional implementation of an update to the protocol that isn’t backwards compatible. 

A hard fork forces validating Nodes to choose which chain to follow, the existing or the new, both of which will exist in parallel but following separate rules. This creates a competition for Node selection, with the chain attracting the most Nodes seen as dominant and likely to see greater end-user adoption.

Hard fork examples 

There have been over 100 Bitcoin hard forks but those that resulted from the block wars (from 2015 – 2017) are the most important.

The block wars were fought over the differing solutions to Bitcoin’s scalability. As consensus couldn’t be reached about the best way to improve the speed and throughput of transactions, a new implementation was created on August 1st, 2017, called Bitcoin Cash (BCH).

BCH didn’t command a majority of Miners. Instead, most Miners stayed with the existing BTC blockchain, eventually implementing the Segregated Witness BIP mentioned above.

BCH itself forked in November 2018 to create Bitcoin SV; an implementation of block space 2,000 times bigger than BTC.

Implications of hard forks

A new cryptocurrency 

A hard fork creates an entirely new cryptocurrency, with an initial distribution reflecting the ownership of the original chain at the point that the fork occurred.

In practical terms, this means that owners of Bitcoin were entitled to claim the same amount of BCH by signing a transaction to show ownership of private keys. If, however, you held BTC through a custodial service, such as a centralised exchange, you have no automatic right to the forked coins. 

It is at the exchange’s discretion whether forks are distributed, so given the huge amount of crypto held on custodial services, this locked value represents a significant lost economy.

There is some similarity with stock splits when shareholders receive additional shares, but the underlying value of the company stays the same. 

The forking of a cryptocurrency should in theory subtract some of the value of the dominant chain, though today BCH and BSV represent less than 1% of the capitalisation of BTC, with the share declining over time.

Diluting tokenomics 

Advocates of Bitcoin and post-Merge Ethereum point to their effectiveness as a store of value. Bitcoin has a fixed supply, with inflation declining annually and eventually reaching zero, while Ethereum’s updated fee structure has turned its inflation neutral.

Yet critics point to hard forks as means to circumvent baked-in tokenomics, creating a carbon-copy that removes supply restrictions. Though true, evidence to date suggests that the supply cap is an important feature that fuels buy-in for Bitcoin.

Ethics & code as law 

The defining features of pubic blockchains like Bitcoin or Ethereum are being open, permissionless and decentralised. 

Anyone is free to join the network of Nodes storing the historical record of transactions contained within a blockchain, or to participate in validating new blocks of transactions in return for a reward. 

Though this openness is heralded as a progressive feature, it can also present ethical dilemmas. For example, a fork can act as a get-out-of-jail-free card if the rules of the blockchain have unintended consequences, such as allowing for exploits.

The most famous example of this moral dilemma is the DAO Hack that Ethereum experienced a year after its launch, which enabled the exploit of 14% of Ether in existence at the time. 

A debate raged in forums, with a split between those intent on honouring the principle of code as law (where no one has the right to censor the execution of code) regardless of the consequences and those who believed there was a moral prerogative to fork Ethereum and restore the funds. 

The Ethereum Foundation chose the latter resulting in the creation of Ethereum and Ethereum Classic; the Ethereum Classic blockchain retained the exploited transactions.

Get started with Skrill