What is a fork?
|— A fork is simply put an update to a blockchain|
— There are two types of forks: soft forks being backwards-compatible, and hard forks which are not
— In the case of a hard fork, a new blockchain with the same transaction history is created
— If a hard fork is not agreed upon, it could lead to the creation of a new cryptocurrency
Cryptocurrencies use blockchain technology as a public ledger for all transactions in its history. While this cannot be altered, the rules which a specific blockchain operates by can to an extent. These updates, known as forks, can play an important role moving forward. Let’s dive into it.
Similar to most information technology, blockchains can receive certain updates. These updates are referred to as forks. They’re similar to how you need to update some computer programs at times – this is the cryptocurrency equivalent of it. An update can be rather minor, or be a large one with significant changes to how a cryptocurrency operates. As an example, back in 2017 the Bitcoin underwent a fork introducing SegWit to the network. This has since become the predominant address format used for managing BTC. Bitcoin will imminently undergo another pivotal fork in the system, with the integration of TapRoot upgrade later this year.
Forks can help cryptocurrencies provide more flexibility and allow adding patches for security, usability, scalability and so forth. A big difference between regular networks and blockchains is that there’s not just a single governing body. Instead, everyone participating in the network must agree with the proposed fork. In other words, they must reach consensus.
Hard and soft forks
You may have heard the term soft fork and hard fork before. They might appear completely the same to the untrained eye. However, there’s quite a difference between them.
Soft forks are quite a bit easier. These updates are backwards compatible. This means that the blockchain itself does not need to be changed in order for these updates to take place and would have little to no impact on the user. It’s like having an update for Microsoft Word, rather than needing to install a brand-new version of the program.
On the contrary, hard forks can be compared to needing to install that new Microsoft Word program. Unlike soft forks, hard forks are not backwards compatible. The update that a hard fork brings conflict with the current state of the blockchain. Since blockchains are immutable, this means that an entirely new blockchain must be created – one that imports the same transaction history. The impact here is clearly much larger and can require quite a bit of development from wallet providers. Fortunately, as a user, you would normally not be the one needing to do this.
Both in the end have the same effect: bringing an update to the network which could add new features or rules to it. However, for hard forks it can be a different story if opinions on the proposed update are divided.
What happens when a network splits?
In the beginning, we discussed that a successful fork must reach consensus in order for it to be implemented. This is especially the case for hard forks, since they create new blockchains. If everyone involved in the network agrees on a fork, it means they’ll all start offering their services to the newly created blockchain. As a user, any wallet provider will update its software to link to the newly created blockchain for you, meaning you wouldn’t need to do anything. Your coins would be on the new blockchain, and the old one will no longer be used as no one supports it.
This isn’t always the case though. Over the course of Bitcoin’s history, there have been a few forks where consensus couldn’t be reached. There were parties that disagreed with the fork, while a large part was still in favor. The best known example is the proposed Bitcoin “BIP91” fork. There was a pretty big party that decided not to support this fork. So what happens when a hard fork is not agreed upon?
The network splits. Two different, viable chains are created. This includes the old, existing chain and the new updated chain. In the case of the BIP91 fork, the majority of the miners chose to support the update, whose chain continued to be known as Bitcoin. The other chain still had quite a lot of support as well and brought a brand-new cryptocurrency to the market: Bitcoin Cash. This meant that someone who owned one 2 Bitcoin (BTC) before the split now owned both 2 Bitcoin (BTC) and 2 Bitcoin Cash (BCH).
While it might seem like you’ve just been given a new cryptocurrency for free, this does come at a cost. It might come with a decrease in network stability – thus security – since the network becomes smaller due to the split.
Ledger and forks
Whenever a cryptocurrency undergoes a fork, it will be up to Ledger to implement necessary changes for our applications and in Ledger Live if it’s supported there. When there’s a fork, no action would be required on your side – it’s us who’ll need to take the necessary preparations. If it’s a cryptocurrency supported by a third-party wallet, it may be them needing to tweak their application. At any rate, we strongly recommend everyone to stay updated on forks and to contact us for any questions relating to an upcoming fork.
As for newly created coins through forks: Ledger supports quite a few of them, Bitcoin Cash being a good example. However, we cannot simply start supporting every single fork that exists. At Ledger, we deeply care about the security of your cryptocurrencies. We are what we like to call “crypto agnostic”, though we cannot overlook potential security issues. Our decision to not support a fork would never be based on our opinion – only on technical analysis. We cannot allow our users to fall victim to theft due to a lack of replay protection, for example.