A hardfork is a method of making significant changes to the protocol code of a blockchain project. The term comes from the English word “fork”. A hardfork is also a way to gain community consensus on new changes. Sometimes hardforks are used to launch new crypto projects.
Why do we need a hardfork?
Every blockchain is based on some kind of protocol, an application made up of different components. The protocol code for most popular blockchain projects is open. This means that it is published in its entirety and can be freely copied.
Blockchain protocols are constantly being improved by removing bugs and vulnerabilities and adding enhancements. Some of these changes can be quite large. Then the developers do a hardfork: they do not change the current version of the protocol, but create a parallel copy of it to which they add new code. And then the validators or bitcoin node operators switch to the new version of the protocol. If they agree with the proposed changes, of course.
This approach keeps the blockchain stable, since the current protocol remains unchanged and there is no risk of failure when upgrading.
Hardforces are conducted for major updates, but they can also serve as a crisis management tool. For example, after The DAO was hacked in 2016, Ethereum developers used a hardforce to “return” approximately $55 million in stolen funds to their owners, a very large amount for the crypto industry at the time.
Who came up with the idea of hardfork?
Hardforces are widely used in programming. Most source code libraries communicate with Git, the world’s most popular version control system for applications. It allows you to create copies of the current library (a kind of offshoot of the original version of the library). Thanks to this feature, developers in particular can test changes that need to be made to the main library without the risk of “breaking” it. At the same time, the copy retains its connection to the “parent” branch.
Thus, during the course of various development tasks, new “branches” often grow out of the original library, which in turn can also be copied. In this way, the history of changes to the application code has a tree-like structure and resembles the tines of a fork with a single base (hence the name of the phenomenon).
This is roughly what happens with the blockchain protocol.
Who is attending the hardfork?
Usually, a hardfork is the result of a long discussion and consensus in the blockchain project community. First, developers come up with a proposal. It is discussed, refined, tested and finally released.
If the update is large and involves not only technical changes, but also other changes – for example, in the tokenomics of the crypto project – the discussion may go beyond the developer community. Bitcoin, for example, has an entire system for proposing protocol improvements called the Bitcoin Improvement Proposal (BIP). Ethereum developers have a similar approach.
To activate a hardforward, it is not enough to just write new code; you must also get the approval of most of the other participants. In addition to the developers, the other key party is the validators, who manage the network’s nodes. The stable and healthy operation of the blockchain, and therefore the entire project, depends on them.
Validators know what the blockchain users need and can give their opinion on proposed changes if necessary. If validators do not support the update, they will simply not migrate their nodes to it.
It is important to understand that a true blockchain protocol cannot be unilaterally updated without the consent of the community, because not only the network is decentralized, but also its software layer.
This is well illustrated by the example of Terra. After the dramatic collapse of the UST stablecoin and the native cryptocurrency LUNA, the founder of the project, Do Kwon, proposed to issue a new digital currency through a hardfork. According to Kwon, it could be used to compensate holders of devalued cryptocurrencies. However, many in the Terra community disagreed with him.
How do new blockchain projects emerge as a result of hardfork?
If most nodes support the hardforward, the network moves to the new version. In PoW blockchains like bitcoin, miners must also signal their willingness to accept the update.
But sometimes a hardforward can cause a split in the community: some nodes support the update and some do not. Then the blockchain can split into two loops: some live with the update, while others continue the old “branch” of code, already adding their own changes.
This is what happened with the same hack of The DAO: the majority supported Vitalik Buterin’s proposal to compensate the victims through the hardfork, but a part of the community didn’t agree. As a result, Ethereum Classic appeared.
A similar case happened with bitcoin: different views on scaling the first cryptocurrency by improving its protocol led some developers and miners to create the Bitcoin Cash project in 2017.
Forks also refer to third-party projects whose code has been copied from another protocol. This is how SushiSwap was created, whose creators made only small changes in the source code of the decentralized exchange Uniswap.
How does the hardfork affect the cryptocurrency rate?
This kind of event almost always affects cryptocurrency prices. If a hardforward is intended to solve some major problems of a blockchain project, there is a consensus about its necessity, and the community expects it, then the price of that network’s cryptoasset is likely to rise.
However, if the hardforward causes a split in the community, does not meet the project’s development goals, or does not go as planned, then it is likely that the native cryptocurrency will lose value as a result. More often than not, this is due to investors’ doubts about the future prospects of the blockchain.
Either way, the hardforward creates uncertainty risk for the cryptocurrency.
How is softfork different from hardfork?
If a hardfork is a “hard” upgrade that requires switching to a new “branch,” softforks are “soft,” usually irrelevant changes that do not require rebooting the network to the new protocol.
