Crypto forks: What they are and how they work

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One road is hard; the other is soft.

© Tatiana Shepeleva/stock.adobe.com; Photo illustration Encyclopædia Britannica, Inc

If you’re a crypto enthusiast or investor, you’ve probably seen—among the many thousands of coins in digital circulation—some with similar names to other, “household name” cryptocurrencies. For example, there’s Bitcoin and Bitcoin Cash, or Ethereum Classic. In these cases, disagreements in their respective cryptocurrency communities led to splits (known as “hard forks”) that created two separate blockchains and two separate coins.

You may also remember hearing about “Ethereum 2.0,” a shorthand for Ethereum’s multiphase upgrade plan that transitioned the network from mining (proof of work) to staking (proof of stake). Notably, some people mistakenly thought “Ethereum 2.0” would be a new coin, and a few bad actors tried to exploit that confusion through fraudulent token offerings. Today, with the term “Ethereum 2.0” no longer in use, it’s simply Ethereum.

In general, such splits are spin-offs stemming from an original coin. They’re a result of changes, called “forks,” made to a blockchain’s protocol. If you’re considering an investment in crypto—forked or not forked—here’s what you should know about these blockchain offshoots.

A cryptocurrency fork is a blockchain software update that can either implement minor changes to the existing protocol or cause it to split into two separate and incompatible protocols.

If the protocol change is significant enough, it can lead to the creation of a new blockchain, plus a new coin.

Many blockchain networks are open source, allowing developers to propose and initiate changes when a majority of them find it necessary.

For instance, developers may decide improvements to the existing chain are needed, or that new functionalities should be added, or that security features must be bolstered. Developers may also try to resolve disagreements in the blockchain community—particularly when developers, miners, or users are unhappy with the direction a blockchain is headed.

Changes to a blockchain’s underlying protocol vary in significance. Sometimes it’s a minor upgrade, like a bug fix. Other times, it can be a major, system-wide overhaul.

If the changes cause the protocol to operate in a fundamentally different way from the original, then the new protocol may split from the old one, resulting in two separate protocols and, in turn, two separate blockchains and coins. This is the difference between a “soft fork” and a “hard fork.”

In 2017, Bitcoin underwent a soft fork to implement the SegWit (Segregated Witness) upgrade. The long and short of it is that Segwit improved several functionalities within the Bitcoin network:

In contrast, a hard fork also took place the same year that resulted in a new cryptocurrency called Bitcoin Cash. Not every developer was happy with the SegWit solution. They argued that SegWit’s block capacity increase was still too small. So they implemented their own solution, but their update wasn’t compatible with the original system. Hence, Bitcoin Cash was born, and those holding coins in the original Bitcoin received an equivalent amount of Bitcoin Cash coins.

As with all software, you can assume that upgrades will take place as blockchain networks evolve. Whether the development community chooses a hard or soft fork—and whether that choice turns out to be a good idea—is something that is only known after the fact, for better or worse. But there are a few general benefits and risks of forks.

Cryptocurrency forks are pivotal turning points in a blockchain network’s evolution. These changes can be minor adjustments or major overhauls. Although forks can offer some important benefits, they also come with significant challenges and risks. As the crypto landscape continues to take shape, understanding forks and their implications is crucial for anyone involved in this dynamic field, whether they’re a passive enthusiast (aka “HODLer”) or an active trader.