What is a Soft Fork? [With Examples]

Cryptocurrencies like Bitcoin and Ethereum have become immensely popular. Today, there are many variants of Bitcoin like Bitcoin Cash (BCH) and Bitcoin SV (BSV). You have probably heard about Ethereum Classic and the Ethereum 2.0 merge too.

If you are new to the crypto space, the idea of different versions of the same crypto coin can be very confusing.

Many crypto buyers and sellers are unaware that these cryptocurrencies have undergone multiple changes since their launch. That means these blockchains are very different from the state they were in at release.

This evolution is a natural process since blockchains operate on software that needs to be upgraded with changing technology over time.

The process of changing a cryptocurrency blockchain is called forking. There are two kinds of forks: hard and soft. This article will cover the second type in detail with some examples.

What is a Fork?

A blockchain fork is a change (or upgrade) in the blockchain software protocol. Forking changes the version – and therefore the back-end functions – in blockchain nodes that accept the upgrade.

The word ‘fork’ refers to the blockchain taking a new path forward, like creating a fork in its original road. The two blockchains created as a result are separate from each other.

A blockchain fork creates a situation where two or more blocks have the same block height so they have the same sequence number on the blockchain. This can cause problems for validating nodes that need to retrieve the details of transactions linked to these blocks.

Blockchain networks validate transactions by consensus mechanisms built into the operating protocol. Therefore, it is necessary for every node connected to it to use the same software version. Failure to upgrade to a new protocol prevents a node from participating in the new version of the blockchain.

However, a node using the older version of the blockchain protocol is still compatible with non-upgraded nodes.

The Benefits of Forking

There are several benefits to creating a blockchain fork. Here are some reasons why forking happens.

  • Security Fixes: As technology improves, so do the tools used by hackers to compromise blockchains. Hackers can take control of the creation of new blocks and mine extra cryptocurrencies or create bogus transactions to siphon out funds. They can also enable double-spending to misuse the blockchain. Blockchain developers need to constantly upgrade cryptographic and other cybersecurity algorithms in the blockchain to prevent these hacks and malicious attacks.
  • Efficiency Changes: Classic blockchains like Bitcoin have historically been inefficient at scaling. We’ve covered the Bitcoin scalability problem in our previous blog post. As cryptocurrencies have become mainstream, blockchain networks have become congested, causing a slowdown in transaction speed and an increase in transaction costs. Upgrades to the protocol help developers address these problems by improving the computational performance of the software and the blockchain network.
  • New Features: Blockchain upgrades allow developers to add new features like additional compatibility layers. Many blockchains are developed by collaborative efforts, and forks help the community implement requested features into the blockchain.
  • Reversing Transactions: Forks can recover funds lost from fake transactions or hacks. This is necessary to maintain capital and user trust in the network.

Types of Blockchain Forks

There are two major types of blockchain forks. Both types of forks have significantly different implications on the accessibility and usability of an affected blockchain network.

These two fork types are also referred to as ‘intended forks’, meaning they were undertaken deliberately to improve blockchain performance.

1. Hard Fork

When we talk about blockchain forks, hard forks are the easiest type to explain.

Hard forks are changes that are not backward-compatible with previous versions. The new rules drastically change the algorithms and database structures for the blockchain. In a hard fork, the protocol upgrade forces every node to follow the new blockchain rules or be excluded from the network altogether.

Hard forks create a separate blockchain network that is isolated from the previous one. The split is achieved at a specific block number. Consequently, a new cryptocurrency token is issued and used within the new blockchain.

The most common examples of hard forks are Bitcoin Cash (BCH), Bitcoin SV (BSV), and Bitcoin Gold (BTG). The Ethereum DAO hack in 2016 is another event that led to an Ethereum hard fork. Ethereum was split into Ethereum Classic (ETC) and standard Ethereum (ETH).

In all these cases, users can no longer mine the cryptocurrencies or trade them on the native blockchain.

2. Soft Fork

A soft fork is a backward-compatible upgrade of the blockchain protocol. The upgrade allows nodes running previous versions to interact with other nodes, although with some functional limitations.

Unlike hard forks, soft forks do not generate a new cryptocurrency coin. However, the network can slowly shift to the new rules as more users accept the upgrade. Soft forks make cryptocurrencies more sustainable in the long run.

A typical rule change in soft forks involves changing the block size limit or block time. These are simple changes to implement without negatively affecting many users on the blockchain network.

Examples of Soft Forks

Bitcoin

As we mentioned at the start of this article, Bitcoin has gone through notable changes, including soft and hard forks. Here are some of the notable instances of Bitcoin’s soft forks.

  • Segregated Witness (SegWit) Upgrade (July 2017): This is one of the most well-known BTC soft forks. The upgrade split up signature data into a separate memory cache. Nodes could transact data into a block stored in the computer’s RAM. This allowed more transactions to fit into a block, without breaking any previous rules. The upgrade also introduced a new address type (Bech32). Full nodes using older P2SH Bitcoin addresses could still transact with Bech32 Bitcoin addresses.
  • Taproot Upgrade (November 2021): The Taproot upgrade added new functionality to the Bitcoin blockchain by adding new cryptographic signatures and improving compatibility with the Lightning network side chain. This upgrade also includes several Bitcoin Improvement proposals. The soft work allowed users to perform more complex transactions with higher speeds and lower costs. Users could also enter into smart contracts over the lightning network.

Ethereum

Like Bitcoin, Ethereum has undergone several upgrades after its release. Many Ethereum changes have been hard forks. However, the Ethereum 2.0 upgrade can be regarded as one of the most significant soft forks in the history of cryptocurrency and blockchain. It’s worth mentioning here that the phrase “Ethereum 2.0” is a misnomer, as it includes users who are using an older version. All accounts will be upgraded to the new version by adding them to the layers.

  • Beacon Chain (December 2020): This is the first of a series of multiple upgrades designed to change the protocol’s consensus mechanism. Before the merger, Ethereum rewarded minors through its native Proof-of-Work consensus protocol. The change moves the consensus mechanism to a more efficient Proof-of-Stake protocol. With this change, a new Beacon Chain was, thus, introduced. Ethereum users could vote on transaction approval based on the amount of ETH they have pooled on this blockchain. The introduction of the blockchain was followed by multiple network upgrades that streamlined transaction costs and a reorganization of users on the entire Ethereum blockchain into execution and consensus users.
  • Bellatrix Upgrade (September 2022): This upgrade finalized the merger of the Ethereum blockchains and moved it into a true Proof-of-Stake consensus mechanism. This upgrade allowed consensus users to execute transactions on the Beacon Chain.

Final thoughts

Blockchains are constantly changing in the face of advancing computer hardware and software technologies. We have witnessed a transition of blockchains from Proof-of-Work mining to Proof-of-Stake validation.

The technology is becoming faster and cheaper to implement - opening doors to online commerce for millions of previously underserved people around the world.

It is safe to say that we will continue to see new forks giving us innovative and sustainable ways to use cryptocurrencies in the future.

The editorial content of OriginStamp AG does not constitute a recommendation for investment or purchase advice. In principle, an investment can also lead to a total loss. Therefore, please seek advice before making an investment decision.