Background: blockchain forks

Forks are related to the fact that different parties need to use common rules to maintain the history of the blockchain. When parties are not in agreement, alternative chains may emerge. While most forks are short-lived some are permanent. Short-lived forks are due to the difficulty of reaching fast consensus in a distributed system.

Whereas permanent forks (in the sense of protocol changes) have been used to add new features to a blockchain, they can also be used to reverse the effects of hacking such as the case with Ethereum and Ethereum Classic, or avert catastrophic bugs on a blockchain as was the case with the bitcoin fork on 6 August 2010.

Blockchain forks have been widely discussed in the context of the bitcoin scalability problem.

Types of forks

Forks can be classified as accidental or intentional. Accidental fork happens when two or more miners find a block at nearly the same time. The fork is resolved when subsequent block(s) are added and one of the chains becomes longer than the alternative(s). The network abandons the blocks that are not in the longest chain (they are called orphaned blocks).

Source code fork

A source code fork or project fork is when developers take a copy of source code from one cryptocurrency project and start independent development on it, creating a separate and new piece of blockchain. Such examples are; Litecoin a source code fork of Bitcoin, Monero fork of Bytecoin and Dogecoin fork of Litecoin.

Hard fork

A hard fork is a change to the blockchain protocol that is not backward compatible and requires all users to upgrade their software in order to continue participating in the network. In a hard fork, the network splits into two separate versions: one that follows the new rules and one that follows the old rules.

For example, Ethereum was hard forked in 2016 to "make whole" the investors in The DAO, which had been hacked by exploiting a vulnerability in its code. In this case, the fork resulted in a split creating Ethereum and Ethereum Classic chains. In 2014, the Nxt community was asked to consider a hard fork that would have led to a rollback of the blockchain records to mitigate the effects of a theft of 50 million NXT from a major cryptocurrency exchange. The hard fork proposal was rejected, and some of the funds were recovered after negotiations and ransom payment.

Alternatively, to prevent a permanent split, a majority of nodes using the new software may return to the old rules, as was the case with Bitcoin split on 12 March 2013.

A more recent hard-fork example is of Bitcoin in 2017, which resulted in a split creating Bitcoin Cash. The network split was mainly due to a disagreement in how to increase the transactions per second to accommodate for demand.

Soft fork

A soft fork is a backward-compatible change to the blockchain protocol that allows new rules to be introduced without requiring all users to upgrade their software. In a soft fork, a majority of the network’s miners implement the new rules and begin following the updated version of the blockchain. The rest of the network can continue to follow the blockchain, but they will be unable to validate that new blocks follow the updated rules. Because a soft fork is backward-compatible, it does not result in the creation of a new blockchain or the splitting of the network.

Instead, it allows the network to gradually transition to the new rules while still maintaining compatibility with the old rules.