In software engineering, a fork consists of a “split” of a project, as developers take the source code to start independently developing on it. Software protocols (the set of rules underlying the software) usually fork as a group decision-making process. All developers have to agree on the new course and direction of the software protocol. A fork can be “soft” when an alteration to the software protocol keeps it backward compatible or “hard” where a divergence of the new chain is permanent. Forks are critical to the development and evolution of Blockchain protocols.
Aspect
Explanation
Definition
A Hard Fork is a significant and intentional divergence or split in a blockchain’s protocol, resulting in two separate and incompatible chains. It occurs when there is a fundamental change in the underlying rules or consensus mechanism of a blockchain network. In a Hard Fork, the blockchain’s transaction history up to the point of the fork remains the same, but the new chain follows a different set of rules, potentially leading to the creation of a new cryptocurrency. Hard Forks are often driven by disagreements within the blockchain community regarding network upgrades, governance, or security features.
Key Concepts
– Blockchain Protocol: The set of rules and algorithms that govern how a blockchain network operates. – Consensus Mechanism: The method by which nodes in a blockchain network agree on the state of the blockchain. – Node: A computer or device that participates in the operation of a blockchain network. – Cryptocurrency: Digital or virtual currencies that use cryptography for security. – Community Consensus: Agreement among participants in a blockchain community regarding proposed changes. – Immutability: The principle that past transactions on a blockchain should be unalterable.
Characteristics
– Creation of a New Chain: A Hard Fork results in the formation of a new blockchain that follows the updated protocol. – Incompatibility: The new chain is not compatible with the old one, leading to a split in the network. – Changes in Rules: The Hard Fork typically introduces changes to the blockchain’s rules, such as block size, transaction validation, or consensus mechanism. – Community Division: Hard Forks often reflect disagreements within the blockchain community. – Historical Continuity: Transaction history before the fork remains the same on both chains. – Potential New Cryptocurrency: Depending on the changes, a new cryptocurrency may be created on the new chain.
Implications
– Blockchain Governance: Hard Forks highlight challenges in blockchain governance and decision-making. – Community Split: They can lead to a division within the blockchain community, with some participants supporting the original chain and others the new one. – Impact on Miners: Miners and nodes must choose which chain to support, potentially affecting their rewards. – Risk of Double Spending: Transactions occurring simultaneously on both chains can lead to double spending. – Market Reaction: Hard Forks can lead to volatility in cryptocurrency markets as traders react to the changes. – Evolving Technology: They demonstrate the ability of blockchain technology to evolve and adapt.
Advantages
– Upgradeability: Hard Forks allow for significant upgrades to a blockchain’s technology and features. – Resolution of Conflicts: They provide a mechanism for resolving disagreements within the blockchain community. – Innovation: New chains created by Hard Forks can introduce innovative features and improvements. – Choice: Users and developers can choose which chain aligns with their preferences and objectives. – Adaptability: Hard Forks demonstrate the adaptability of blockchain networks to changing needs and requirements. – Market Dynamics: They can stimulate interest and investment in the cryptocurrency market.
Drawbacks
– Community Division: Hard Forks can lead to division and polarization within the blockchain community. – Network Security: The split can temporarily reduce network security as miners and nodes shift between chains. – Double Spending: Double spending risks increase during a Hard Fork. – Complexity: Managing the transition and upgrade process can be complex and require technical expertise. – Market Volatility: Cryptocurrency markets may experience significant price volatility in response to Hard Fork announcements. – Reputation Risks: Failed or contentious Hard Forks can harm the reputation of a blockchain project.
Applications
Hard Forks are typically employed in the context of blockchain networks and cryptocurrencies to implement significant upgrades, resolve disputes, or introduce new features.
Use Cases
– Bitcoin Cash (BCH): Bitcoin Cash resulted from a Hard Fork of Bitcoin (BTC) in 2017, primarily over disagreements about block size limits. – Ethereum (ETH): Ethereum has undergone multiple Hard Forks to implement network upgrades and improve scalability. – Bitcoin SV (BSV): Bitcoin SV emerged as a result of a Hard Fork of Bitcoin Cash, focusing on larger block sizes and scaling. – Monero (XMR): Monero has had several Hard Forks to enhance privacy features and security. – Tezos (XTZ): Tezos has implemented Hard Forks as part of its governance model to introduce protocol changes and upgrades. – Zcash (ZEC): Zcash has undergone Hard Forks to address security vulnerabilities and improve network performance.
In a Blockchain, a soft fork occurs when an alteration to the software protocol keeps it backward compatible. In other words, the new forked chain follows new rules while also honoring the old rules.
In a hard fork, a divergence of the new chain is permanent. Nodes running older versions will no longer be accepted by (or be able to communicate with) the new version.
Understanding soft forks and hard forks
When a consumer updates a digital banking app on their smartphone, the process is painless and seamless. Updates only take a few minutes and some apps do so automatically. What’s more, there are rarely any usability issues with the new version.
Open-source cryptocurrencies are very different. There is no central authority releasing updates or making changes as it sees fit. There is also no requirement for Bitcoin users to understand the code that underpins it. Nevertheless, freely accessible code is an important facet of a decentralized, open-source platform.
Soft and hard forks are the cryptocurrency versions of updates for computer programs, allowing networks to be upgraded in the absence of a central authority. Forking as a term describes any scenario where a cryptocurrency project needs to make technical updates to its code.
Forking necessitates that a Blockchain splits into two branches. The nature of the split can be categorized as either hard or soft.
In the next section, we’ll take a look at each in more detail.
Soft forks
As noted earlier, a soft fork is backward compatible with the original chain continuing to follow old rules. Upgraded nodes can still communicate with non-upgraded nodes, which is another way of stating that new rules do not clash with old rules.
This kind of fork requires that a majority of miners upgrade before the new rules are enforced. A recent example of a soft fork is the Segregated Witness (SegWit) fork which occurred after the Bitcoin/Bitcoin Cash split. This update changed the format of transactions and blocks, but old nodes could still validate them without breaking the rules.
Hard forks
Hard forks are backwards-incompatible updates. Since nodes add rules that conflict with older nodes, new nodes can only communicate with those operating on the latest version.
Here, the blockchain must split into two, parallel chains that continue to propagate blocks and transactions separately. One operates under the old rules while the other under the new rules.
It’s important to note that until the point of divergence, each separate chain has a shared history. If a user held Bitcoins before the split, they end up holding coins on each of the two subsequent chains.
An example of a hard fork is the 2017 split that saw Bitcoin separate into two chains: Bitcoin and Bitcoin Cash. This occurred before the aforementioned SegWit soft fork and was the result of disagreement over increasing the block size.
Since an increase in block size required a rule change, nodes only accepted blocks smaller than 1MB. This meant that an otherwise valid 2MB block would be rejected and thus be incompatible with the previous version.
Key takeaways:
Forking helps cryptocurrency Blockchain make important updates to its code in the absence of a central authority. Hard and soft forks describe the nature of these updates as Blockchain networks split in two.
A soft fork is backward-compatible with the original chain. Older nodes can communicate (and are compatible with) new nodes without breaking rules.
A hard fork is backward-incompatible with the original chain. This split is a permanent divergence from a previous version of the Blockchain. As a result, nodes running previous versions are no longer compatible with the newest version.
Web3 describes a version of the internet where data will be interconnected in a decentralized way. Web3 is an umbrella that comprises various fields like semantic web, AR/VR, AI at scale, blockchain technologies, and decentralization. The core idea of Web3 moves along the lines of enabling decentralized ownership on the web.
A blockchain protocol is a set of underlying rules that define how a blockchain will work. Based on the underlying rules of the protocol it’s possible to build a business ecosystem. Usually, protocol’s rules comprise everything from how tokens can be issued, how value is created, and how interactions happen on top of the protocol.
In software engineering, a fork consists of a “split” of a project, as developers take the source code to start independently developing on it. Software protocols (the set of rules underlying the software) usually fork as a group decision-making process. All developers have to agree on the new course and direction of the software protocol. A fork can be “soft” when an alteration to the software protocol keeps it backward compatible or “hard” where a divergence of the new chain is permanent. Forks are critical to the development and evolution of Blockchain protocols.
A Merkle tree is a data structure encoding blockchain data more efficiently and securely. The Merkle tree is one of the foundational components of a Blockchain protocol.
The nothing-at-stake problem argues that validators on a blockchain with a financial incentive to mine on each fork are disruptive to consensus. Potentially, this makes the system more vulnerable to attack. This is a key problem that makes possible underlying blockchain protocols, based on core mechanisms like a proof-of-stake consensus, a key consensus system, that together the proof-of-work make up key protocols like Bitcoin and Ethereum.
A 51% Attack is an attack on the blockchain network by an entity or organization. The primary goal of such an attack is the exclusion or modification of blockchain transactions. A 51% attack is carried out by a miner or group of miners endeavoring to control more than half of a network’s mining power, hash rate, or computing power. For this reason, it is sometimes called a majority attack. This can corrupt a blockchain protocol that malicious attackers would take over.
A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result they get rewarded in coins.
An Application Binary Interface (ABI) is the interface between two binary program modules that work together. An ABI is a contract between pieces of binary code defining the mechanisms by which functions are invoked and how parameters are passed between the caller and callee. ABIs have become critical in the development of applications leveraging smart contracts, on Blockchain protocols like Ethereum.
A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like the Ethereum’s Casper protocol). Proof of Stake has the advantage of security, reduced risk of centralization, and energy efficiency.
Proof-of-Activity (PoA) is a blockchain consensus algorithm that facilitates genuine transactions and consensus amongst miners. That is a consensus algorithm combining proof-of-work and proof-of-stake. This consensus algorithm is designed to prevent attacks on the underlying Blockchain.
According to Joel Monegro, a former analyst at USV (a venture capital firm) the blockchain implies value creation in its protocols. Where the web has allowed the value to be captured at the applications layer (take Facebook, Twitter, Google, and many others). In a Blockchain Economy, this value might be captured by the protocols at the base of the blockchain (for instance Bitcoin and Ethereum).
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
Blockchain companies use sharding to partition databases and increase scalability, allowing them to process more transactions per second. Sharding is a key mechanism underneath the Ethereum Blockchain and one of its critical components. Indeed, sharding enables Blockchain protocols to overcome the Scalability Trilemma (as a Blockchain grows, it stays scalable, secure, and decentralized).
A decentralized autonomous organization (DAO) operates autonomously on blockchain protocol under rules governed by smart contracts. DAO is among the most important innovations that Blockchain has brought to the business world, which can create “super entities” or large entities that do not have a central authority but are instead managed in a decentralized manner.
Smart contracts are protocols designed to facilitate, verify, or enforce digital contracts without the need for a credible third party. These contracts work on an “if/when-then” principle and have some similarities to modern escrow services but without a third party involved in guaranteeing the transaction. Instead, it uses blockchain technology to verify the information and increase trust between the transaction participants.
Non-fungible tokens (NFTs) are cryptographic tokens that represent something unique. Non-fungible assets are those that are not mutually interchangeable. Non-fungible tokens contain identifying information that makes them unique. Unlike Bitcoin – which has a supply of 21 million identical coins – they cannot be exchanged like for like.
Decentralized finance (DeFi) refers to an ecosystem of financial products that do not rely on traditional financial intermediaries such as banks and exchanges. Central to the success of decentralized finance is smart contracts, which are deployed on Ethereum (contracts that two parties can deploy without an intermediary). DeFi also gave rise to dApps (decentralized apps), giving developers the ability to build applications on top of the Ethereum blockchain.
The history of Bitcoin starts before the 2008 White Paper by Satoshi Nakamoto. In 1989 first and 1991, David Chaum created DigiCash, and various cryptographers tried to solve the “double spending” problem. By 1998 Nick Szabo began working on a decentralized digital currency called “bit gold.” By 2008 the Bitcoin White Paper got published. And from there, by 2014, the Blockchain 2.0 (beyond the money use case) sprouted out.
An altcoin is a general term describing any cryptocurrency other than Bitcoin. Indeed, as Bitcoin started to evolve since its inception, back in 2009, many other cryptocurrencies sprouted due to philosophical differences with the Bitcoin protocol but also to cover wider use cases that the Bitcoin protocol could enable.
Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.
An imaginary flywheel of the development of a crypto ecosystem, and more, in particular, the Ethereum ecosystem. As developers join in and the community strengthens, more use cases are built, which attract more and more users. As users grow exponentially, businesses become interested in the underlying ecosystem, thus investing more in it. These resources are invested back in the protocol to make it more scalable, thus reducing gas fees for developers and users, facilitating the adoption of the whole business platform.
Solana is a blockchain network with a focus on high performance and rapid transactions. To boost speed, it employs a one-of-a-kind approach to transaction sequencing. Users can use SOL, the network’s native cryptocurrency, to cover transaction costs and engage with smart contracts.
In essence, Polkadot is a cryptocurrency project created as an effort to transform and power a decentralized internet, Web 3.0, in the future. Polkadot is a decentralized platform, which makes it interoperable with other blockchains.
Launched in October 2020, Filecoin protocol is based on a “useful work” consensus, where the miners are rewarded as they perform useful work for the network (provide storage and retrieve data). Filecoin (⨎) is an open-source, public cryptocurrency and digital payment system. Built on the InterPlanetary File System.
BAT or Basic Attention Token is a utility token aiming to provide privacy-based web tools for advertisers and users to monetize attention on the web in a decentralized way via Blockchain-based technologies. Therefore, the BAT ecosystem moves around a browser (Brave), a privacy-based search engine (Brave Search), and a utility token (BAT). Users can opt-in to advertising, thus making money based on their attention to ads as they browse the web.
Uniswap is a renowned decentralized crypto exchange created in 2018 and based on the Ethereum blockchain, to provide liquidity to the system. As a cryptocurrency exchange technology that operates on a decentralized basis. The Uniswap protocol inherited its namesake from the business that created it — Uniswap. Through smart contracts, the Uniswap protocol automates transactions between cryptocurrency tokens on the Ethereum blockchain.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
Discover more from FourWeekMBA
Subscribe now to keep reading and get access to the full archive.
