Cryptocurrencies evolve over time, adopting new network rules voted on by miners. This is known as forking. Since its invention in 2009, Bitcoin has forked many times—sometimes with a soft fork and sometimes with a hard fork.
Here’s a look at how each works, how they differ, and what they mean for investors.
Why Does Bitcoin Fork?
Developers, investors and miners will often call for a bitcoin fork because of disagreements on how best to manage the growth of Bitcoin. And while this has fueled innovation, none of the forks have come near to exceeding the usage and value of the original bitcoin blockchain, also called Bitcoin Core.
Recommended: What is Bitcoin and How Exactly Does it Work?
What Is A Hard Fork?
Hard forks happen when miners vote for a significant change to the Bitcoin blockchain protocol. A hard fork creates a new blockchain. And after a hard fork, both the old and new versions of the blockchains persist, separate and side by side.
What Is A Soft Fork?
Soft forks are more subtle software alterations of the blockchain. After a soft fork, the original blockchain remains valid, and users simply adopt the update.
Other Bitcoin Alterations
There are also other kinds of software alterations that create clone or copycat “altcoins.” In the history of Bitcoin, some of these created entirely new forms of crypto, such as Litecoin or Vertcoin.
The main difference is that while these “altcoins” used Bitcoin code as a jumping-off point, they didn’t add on to the existing Bitcoin blockchain. Instead, they created their own trading networks. These coins employ different mining algorithms, which means the computers that mine the coins operate on different software.
Main Differences Between Soft Forks and Hard Forks
|Soft Fork||Hard Fork|
|Backward Compatible?||Yes||No||Block Size||Smaller||Larger||Speed||Slower||Faster||Security||Lower||Higher|
One major difference between hard forks and soft forks comes down to something called “backward compatibility.” The term refers to the ability of a software system to use interfaces and data from earlier versions of the system.
The change of software protocol in a soft fork offers backward compatibility. While the new software may speak a new dialect, it still understands data in the old dialect. A hard fork is more like changing the language that the software speaks. It no longer understands what’s being said in the old language.
This is why a hard fork splits the network into two parts—the one before the fork and the one after. Because there is no backward compatibility, once forked the two parts of the network can never interact again. Transaction blocks that are valid in one network are no longer considered valid in the other one.
One reason for a fork on a cryptocurrency like Bitcoin is to adjust the size of the blocks used in their blockchain. Those blocks hold transaction data, and the more data in each block, the faster the transaction.
Block size was one of the major reasons behind the first hard fork for Bitcoin, when a hard fork created Bitcoin Cash (BCH) in 2017. Because of its larger block size, one block in the BCH blockchain can record a larger number of transactions than a block in the original Bitcoin blockchain. That allows the currency to process more money faster.
Some forms of crypto may want to limit the size of the blocks to increase the payout to miners. This is where a soft fork can work, by adding a new set of rules to the existing blockchain to reduce block size from, say, 1MB to 500KB. With a soft fork, the 1MB block will still be considered valid by existing nodes, but as more nodes update to the soft fork, they may reject any blocks larger than 500KB.
A soft fork can only restrict the size of the blocks. It can only add new rules—it can’t change existing rules.
Speed and Security
Another famous use of a hard fork was done for the sake of blockchain security after a major hack. The Ethereum blockchain voted unanimously to hard fork as part of a strategy to reverse a hack that stole tens of millions of dollars’ worth of its coins. As a result, the original blockchain is now referred to as Ethereum Classic, and the fork became known as Ethereum.
That’s an extreme scenario. And there are many situations involving speed or volume or security that arise on a crypto network where a soft fork would get the job done.
But when a network needs to solve a problem quickly, hard forks have a major advantage. With both hard and soft forks, there’s a period when the old and new versions of the cryptocurrency’s code both live on the network. But with a hard fork, the old and new versions are divided clearly and forever on two separate networks.
With a soft fork, however, both versions will remain in place for however long it takes for all the users on the network to update the software. And there’s always the risk that the legacy version could win out. That’s why, when a hack or another major security issue is at play, the predominance of users and developers tend to prefer a hard fork.
Notable Bitcoin Forks in the Past
Bitcoin has forked on more than one occasion. In addition to Bitcoin Cash, these are some of the other notable forks:
• Litecoin: Litecoin (LTC) was created to enable faster transactions, using the Scrypt algorithm rather than Bitcoin’s SHA-256 algorithm. LTC transactions are thought to confirm faster and have lower fees than BTC in general.
• Vertcoin: Vertcoin (VTC) uses a different consensus algorithm for mining. The goal of VTC was to be ASIC-resistant, meaning that the market for mining couldn’t be taken over by people with access to resources for purchasing large and expensive ASIC (application-specific integrated circuit) computer hardware.
• BSV: BSV is a hard fork from the Bitcoin Cash network, initiated by Craig Wright, who claims that he is in fact Satoshi Nakamoto, the creator of Bitcoin. (That remains unproven; Satoshi Nakamoto may in fact be a pseudonym for a group of people.)
• Bitcoin Gold: This fork utilizes an ASIC-resistant proof-of-work mining algorithm, to create a coin that anyone can mine at home without the need for expensive specialized computer hardware.
Many of these cryptocurrencies forked from Bitcoin have undergone forks of their own. For instance Litecoin has had its own hard fork, which gave birth to Litecoin Cash.
But for all the improvements those forks have offered, Bitcoin is still the predominant cryptocurrency in the world today, with a market capitalization of $734,951,021,330 as of June 16, 2021, according to Coinmarketcap.com. Not that some of the forks are doing so badly. Bitcoin Cash and Litecoin boast market caps of $$11,339,133,478 and $11,303,929,705, respectively.
As the original crypto, Bitcoin was the first to fork, and has forked a few times since—with both hard forks and soft forks. The hard forks, like Bitcoin Cash and Bitcoin Gold, created entirely new blockchains. Soft forks, on the other hand, are backwards compatible, meaning they work with the existing blockchain.
Some Bitcoin forks created entirely new altcoins, and thus additional investing opportunities for investors interested in crypto. SoFi Invest® offers members the opportunity to buy Bitcoin, Ethereum, Cardano, and 17 more coins—all from the convenience of the mobile app.
Photo credit: iStock/I am 3D animator artist
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A., or SoFi Lending Corp.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.