What is a blockchain fork?

A fork refers to any divergence in the history of a blockchain protocol that results in the formation of two separate chains, both of which would have a shared history up to the point of the fork itself. There are two main types of fork; hard and soft.

To break this down further, the splitting of the blockchain creates two separate competing paths. This occurs only when a decentralized network’s protocol is changed or altered from its original state, and as a result leads to a divergence in the chain’s transaction history. In this scenario, either a new branch is created (known as a hard fork), or compatibility is maintained (known as a soft fork). 

Typically, a fork occurs intentionally as part of planned upgrade to the blockchain’s protocol. However, there are instances where there is an unintentional creation of competing blocks that results in a temporary split in the blockchain.

A hard fork occurs when a significant change is made to the cryptocurrency’s protocol. In this case, an intentional upgrade or modification to the protocol results in a permanent divergence in the blockchain. It is worth noting that in this scenario the update is not backwards compatible, hence the permanent divergence.

Hard fork forces validators to choose which chain to pursue - the existing or the new. However, both will continue to exist in parallel, simply following a different set of rules. As a result, competition for the selection of validator nodes increases, as whichever chain attracts the most nodes can appear from the outside as the most dominant chain with the potential to see greater long term adoption. 

Example: Bitcoin Cash

A key example of a hard fork is Bitcoin Cash. On August 1, 2017, a group of developers and miners decided to implement a significant change to the Bitcoin protocol. This change involved the increase of the block size from 1 MB to 8 MB, aiming to improve the scalability and transaction throughput of the Bitcoin network.

It must be noted that this change was not backward-compatible with the existing Bitcoin protocol, meaning it resulted in a permanent split from the original Bitcoin blockchain. Therefore, Bitcoin Cash (BCH) was created as a new cryptocurrency with its own separate blockchain. The existing holders of bitcoin at the time the fork occurred received an equal amount of Bitcoin Cash, resulting in the creation of a unique blockchain and native asset.

A soft fork occurs as a result of a change to the blockchain protocol that is backward-compatible. This means that miners and nodes that are running on a previous version of the software can still accept blocks produced by nodes running on the updated software, ensuring unified continuity for the network and the maintenance of a single network.

Typically a soft fork introduces new rules or restrictions that can make previous transactions that were valid to become invalid, for example fixing security vulnerability and enhancing existing functionality, meaning overall the protocol's rules become much tighter.

Example: Bitcoin Improvement Protocol (BIPs)

Bitcoin, like other networks, can also undergo soft forks. Bitcoin has a protocol change control process that is built to be democratic amongst its network participants, meaning the community can put forward proposals and make decisions to improve aspects of the network, such as functionality and security. These changes are documented as part of the Bitcoin Improvement Proposals (BIPs). As long as all members of the community agree on the BIP, both the community and the blockchain can move forward with the changes. However, as you can imagine, there are cases where some members of the community may feel strongly against a certain change or development, and as a result this may trigger them to develop a new community or system. In this case, it becomes a hard fork.

The first BIPs were submitted back in 2011, a full record of which can be found on Github, with the soft forks outlined in brackets. Two key examples, notably some of the most important, are; Segregated Witness (BIP 141), which is a soft fork with the objective of improving the scalability by enabling more transactions to fit into one single block, and, Taproot (BIP 340-342), a soft fork with the objective of improving privacy, efficiency, and the enablement of smart contracts.

Regardless of what consensus mechanism the blockchain leverages, the common characteristic is the pseudo-random selection process as to how new blocks are added to the blockchain. As a result of this process it can, in some instances, create two new blocks as opposed to one. Meaning, without intending to, two competing versions of the blockchain have been created.

Orphan/Stale Blocks:

These are created when two Miners submit a valid new block at the exact same time. In this case, the majority of the Nodes will discard one of those blocks.

Uncle Blocks:

If we take the example of Ethereum prior to The Merge, two blocks could be mined at the exact same time but the block that showcased greater Proof-of-Work was added to the chain. Post-Merge, using a Proof-of-Stake mechanism, the block proposers are pre-selected, meaning this scenario is removed entirely.

Implication of Forks:

Overall, forks are a key part of how cryptocurrency ecosystems evolve. Forks reflect how diverse the range of perspectives and priorities can be within the cryptocurrency community, serving as a mechanism for innovation, experimentation, and governance. Ultimately, it is important to understand the impact forks can have, not only on their respective blockchain networks, but also the implications on the wider ecosystem.

Network Fragmentation: 

Forks can lead to the fragmentation of the community and resources within a cryptocurrency network. This fragmentation occurs when a community splits due to differences in ideology, governance, or technical direction. Fragmentation can dilute the network effect and weaken the overall ecosystem.

Creation of New Assets: 

Forks often result in the creation of new cryptocurrencies. In the case of a hard fork, the original blockchain continues along with the new forked blockchain, resulting in the creation of a new cryptocurrency. Holders of the original cryptocurrency usually receive an equivalent amount of the new cryptocurrency. This can lead to the proliferation of new assets in the market.

Market Volatility: 

Forks can introduce uncertainty and volatility into the market. Leading up to a fork, there may be speculation and uncertainty regarding the outcome, leading to price fluctuations. Additionally, after the fork, the value of the original cryptocurrency and the newly created one may fluctuate as the market determines their respective values.

Innovation and Experimentation: 

Forks can also drive innovation and experimentation within the cryptocurrency space. They allow for the testing of new features, consensus mechanisms, and governance models. Communities may fork a blockchain to experiment with different approaches to scaling, privacy, or governance, leading to the evolution of the technology.

Community Governance: 

Forks can serve as a mechanism for community governance. When there is a disagreement within a community regarding the direction of a project or protocol upgrades, a fork allows dissenting members to pursue their vision independently. This can lead to the emergence of diverse communities with different priorities and values.

Overall, it is likely we will continue seeing forks taking place. As the cryptocurrency ecosystem grows and evolves, different communities will continue to have different visions regarding the direction of various projects. Similarly, the decentralized nature of blockchain technology allows for experimentation and innovation. Meaning, developers and communities will continue to explore new ideas and approaches, sometimes resulting in forks as they implement changes that are not universally accepted. Finally, challenges relating to governance, such as disagreements over protocol upgrades, consensus mechanisms, or token distribution, are likely to persist in decentralized networks, and forks may be seen as a solution.