A blockchain fork occurs any time a blockchain splits into two different chains.
Blockchain forks can occur naturally or be planned, and their impact can range from innocuous to contentious.
Here’s a quick look into fork types, why forks occur, and how forks can impact the blockchain and community.
Most Forks Occur Normally
Every blockchain uses a worldwide network of computers called nodes to process transactions, continually adding blocks of information to the blockchain and verifying past transactions.
A normal result of this process is that multiple nodes will occasionally create a new block of information at the same time, resulting in two chains. But blockchain code designates that when the next block is added to either of these chains, the longer chain will continue to be used and the shorter chain will automatically become abandoned.
Potential impact of naturally occurring forks: This type of fork is a natural, expected development that is harmless.
Forks Often Introduce Protocol Changes
Changes to blockchain protocol (the rules or code that governs the chain) are introduced by forking the blockchain, and the method in which these changes take place varies depending on the proposed rule changes.
It’s important to note that just because a change is proposed doesn’t mean it will be accepted by the network. This is a major benefit of public blockchains: they are public. There isn’t anyone giving orders from the top of a corporate hierarchy; instead, public blockchains require a majority vote before changes are accepted, and this voting is done by community members choosing to upgrade nodes to the new protocol or not. If a majority of nodes upgrade to the new protocol, then the new rules are seen as beneficial to the community as a whole, and the chain with the new protocol will automatically be the primary chain going forward.
Soft Forks Introduce Backwards Compatible Protocol Changes
Soft forks introduce backwards compatible protocol changes, or upgrades where the new rules that are added don’t break any of the older, pre-existing rules.
Backwards compatibility means that everyone in the network can still participate, even if they haven’t upgraded. The users who haven’t upgraded may not be able to take advantage of all features, though, creating an incentive for everyone to upgrade once a majority has approved the protocol changes.
As an example, a user may still be able to send money and access records on the Bitcoin blockchain without upgrading, but they may no longer be able to mine Bitcoin until they upgrade to the new protocol.
Still, if the majority chooses not to upgrade, then the soft fork is rejected and the blockchain will continue on without the proposed protocol changes.
Potential impact of soft forks: Soft forks usually have positive impact as they add increased functionality and require support from the majority of nodes for approval. In theory, a soft fork could lead to two distinct chains, but in practice it does not.
Hard Forks Can Be Harmless or Contentious
Hard forks occur whenever a major change of protocol requires all users to upgrade. Protocol changes are not backwards compatible in a hard fork; instead, they introduce protocol aspects that break the old rules, and nodes that run on old protocol will view any new transactions as invalid.
Most hard forks are planned in a project’s roadmap, or they garner support from a large majority of users. In this case, network participants choose to upgrade and follow the new blockchain, and the old chain is discarded.
Sometimes, though, users vehemently disagree on how the network should move forward and rival factions emerge. As long as there is enough support for the minority blockchain, both chains may coexist after the fork. The most notable contentious hard fork is Bitcoin Cash splitting from Bitcoin, a result of community disagreement over how best to scale the Bitcoin blockchain. Both sides still have sizable groups of loyal, vocal followers.
One significant result of a fork into two separate but continuing chains is that all users who have a balance at the time of the split will then have an equal balance of coins in both chains. (A user’s balance at the time of the fork is reflected in the history of each chain.)
This “free money” effect has caused some smaller communities of users to create their own forks, such as with Bitcoin Gold, Bitcoin Diamond, and Litecoin Cash, among others. Many of these smaller forks are largely seen as cash grabs instead of serious blockchain networks.
Potential impact of hard forks: Since hard forks inherently come with a major change in protocol, they always pose a risk of creating two separate blockchains. Most hard forks, by far, are harmless and go as planned.
But if a hard fork is expected to result in two separate chains, look for price to rise leading up to the fork as users and speculative investors look to obtain holdings in both chains. Historically, the minority chain’s price begins at a fraction of the majority chain’s price, and many investors dump coins soon after the fork (sometimes for both chains).