A hard fork is when cryptocurrencies such as Bitcoin splits in two. It occurs when a cryptocurrency’s existing code is changed, resulting in both an old and new version.
For Bitcoin, the 1MB limit for the size of each block was originally implemented to lower the possibility of potential spam and attacks. When there were not that many transactions in the network, the limit wasn’t affecting anything at all.
As Bitcoin became more popular, the limit started causing blocks to pile up, which unnecessarily extended the transition times. The situation lost control in May 2017, when it was reported that some people had to wait for confirmation for up to four days.
Users could pay higher transaction fees to speed up the confirmation, but this approach basically rendered Bitcoin useless as method to pay for things, especially when it came to smaller transactions as the fee transaction could cost more than the cost of purchase itself.
The Bitcoin analysts came up with two possible solutions to this problem: Bitcoin Unlimited and Segregated Witness (SegWit).
Bitcoin Unlimited would scrap the block size limit altogether. Many miners liked this solution, as the lack of block size limit would not only prevent blocks from piling up but also raise the overall miner’s fee per block.
However, a lot of developers were against this proposal, saying that its implementation will lead to small miners going out of business and could lead to a centralization of the entire network by massive mining corporations.
A Segregated Witness solution implied storing some of the information in separate files out of the blockchain. Developers claimed that it would free up a lot of storage space, the blocks will fit in more transactions and the confirmation time will decrease. But, many people believed it was just a more complicated temporary stopgap in comparison to the Bitcoin Unlimited approach.
As a result, a compromise protocol called SegWit2x was developed. This protocol included storing some of the information outside of the Blockchain as well as increasing the block size limit to 2MB. The protocol was implemented on Aug. 1, 2017, after 95 percent of miners voted for that. However, the network didn’t see the immediate increase in the block size limit. To a lot of people, this meant only postponing a problem.
Additionally, this decision was more in favor of users who treat Bitcoin as an investment opportunity and not a payment system it was created to be.
During the Future of Bitcoin conference in Arnhem, Netherlands, the first implementation of the Bitcoin Cash protocol called Bitcoin ABC was announced by Amaury Séchet, a former engineer at Facebook.
Séchet and his team of developers decided to abandon the SegWit2x protocol and increase the block size limit to 8MB. As such drastic changes required their creation to split from the original Bitcoin network, it was announced that a hard fork will take place on Aug. 1, 2017.
A hard fork is the only currently known method for developers to update Bitcoin software. Developers split the network and essentially create a new Blockchain with different rules. The original and the forked version of the cryptocurrency have identical Blockchains all the way up to the block when the split happened. From there on, the two networks exist independently.
After the split occurred, everyone who held Bitcoins before the hard fork received the same amount of Bitcoin Cash tokens.
The new cryptocurrency was quickly accepted by users, as by the end of the first day of announcing the hard fork, Bitcoin Cash became the third in cryptocurrencies behind Bitcoin and Ethereum in terms of market capitalization.
To conclude, a hard fork is when cryptocurrencies such as Bitcoin splits in two. It occurs when a cryptocurrency’s existing code is changed, resulting in both an old and new version.
- With a soft fork, the two versions of the software are meant to be compatible.
- With a hard fork, the two versions of the software are meant to be incompatible.
So both fork types create two different versions of the software (and therefore two different versions of the blockchain and two different versions of the coin AKA token), but a hard fork is to create two incompatible blockchains/tokens, while a soft fork creates two compatible versions of the software and tokens.
Remember that not every fork will lead to owners of cryptocurrencies getting “free coins,” however when a legit hard fork occurs that creates a new cryptocurrency, this is the case. For instance, Bitcoin holders received one “free” BCH (Bitcoin Cash) for each BTC (Bitcoin) they owned. That is an absurdly good deal (although one risks the original asset’s price dropping in “split” events like this). Technically one can create a new version of a coin and choose another distribution method, for example, they can do an airdrop or sell the new coin on the open market