When we talk about cryptocurrencies, it's hard to avoid terms and concepts that seem to go beyond commonplace understanding. One such term is “hardfork”. At first glance, it may seem like something technical and complicated, but let's understand together what it is and why it's important even for a beginner.
Hardfork (or “hard fork”) in the context of blockchain technology and cryptocurrencies refers to a radical change in the network's protocol that invalidates previous rules or, conversely, introduces new rules that did not previously exist.
Technical side
At the heart of every blockchain is a protocol – a set of rules that all participants in the network follow. These rules determine how transactions are formed and verified, how new blocks are created, and many other aspects of the network. When a significant change occurs in these rules that make new blocks incompatible with previous blocks, a hardfork occurs.
Reasons for conducting a hardfork
Technical Improvements:
Optimisation: Over time, blockchain technology may require optimisation to operate more efficiently. A hardfork may offer an improved consensus algorithm, faster block times, or other technical improvements.
Scalability: One of the main challenges of many blockchains is scalability. A hardfork can increase the block size or introduce new mechanisms to handle more transactions per second.
Security: A hardfork may be required to address vulnerabilities found or to improve security.
Disagreement within the community:
Philosophical differences: Community members may have different views on the future and goals of cryptocurrency. These differences may relate to issues of privacy, decentralisation, economic model and other key aspects.
Conflict of interest: Different groups (e.g. developers, miners, investors) may have different interests, and sometimes these interests may conflict.
Development and governance: Questions about who makes decisions regarding cryptocurrency development and how those decisions are made can also lead to a hardfork.
Emergency Response:
Critical Vulnerabilities: If a serious threat or vulnerability is discovered that could put user funds or the security of the entire network at risk, a hardfork can be a quick way to fix the problem.
Rollback of transactions: In rare cases, if a major breach or attack occurs, the community may decide to run a hardfork to undo or modify recent transactions.
Economic or monetary changes:
Issuance regulation: Hardfork may make changes to the algorithm for rewarding miners, the rate at which new coins are issued, or the maximum number of coins.
Incentivising activity: In some cases, a hardfork may be intended to stimulate economic activity or increase participation in the network.
Implications of the hardfork
Blockchain Splitting: One of the most immediate and obvious consequences of the hardfork is the splitting of the blockchain into two independent chains. From the moment the hardfork is activated, each blockchain will evolve independently, and transactions conducted on one blockchain will not be recognised as valid on the other.
Token duplication: After a blockchain split, owners of the original cryptocurrency automatically receive an equivalent number of tokens on the new blockchain. For example, after the Bitcoin hardfork in 2017, Bitcoin owners received an equivalent amount of Bitcoin Cash.
Market volatility: Periods around hardforks are often accompanied by increased market volatility. Investors and traders may react to upcoming changes, which can lead to significant price fluctuations.
Uncertainty and security risks: New chains may be vulnerable to various attacks, especially if most of the mining power remains on the original chain. Technical errors or bugs in the new code are also possible.
Competition between chains: In some cases, especially if the community remains divided, there may be competition between the original and new chains for resources, developers, users, and miners.
Compatibility and update issues: After the hardfork, developers, exchanges, wallets, and other services may need to update their software to support both chains.
Social and cultural changes: Hardfork may cause divisions not only technologically but also socially. Different groups may have different views on the direction of the project, which may lead to the formation of two separate communities with different values and priorities.
Examples of harforks
Bitcoin and Bitcoin Cash (August 2017): This hardfork has become one of the most discussed in the crypto community. It occurred due to a disagreement over block size on the Bitcoin network. When part of the community wanted to increase the block size to improve scalability, another part was against it. As a result, Bitcoin Cash was created with an increased block size.
Ethereum and Ethereum Classic (July 2016): Following an attack on The DAO, an autonomous investment organisation on the Ethereum platform, a large amount of ETH was stolen. In order to return funds to investors, the Ethereum community decided to conduct a hardfork that eliminated the possibility of withdrawing the stolen funds. The part of the community that believed that the blockchain should not change, even if it was justified, continued to operate under the old rules, creating Ethereum Classic.
Monero (April 2018): Monero regularly conducts hardforks to improve its features and privacy. However, in April 2018, this process caused the creation of several new coins, such as MoneroV and Monero Classic, due to disagreements in the community.
Importance of the hardfork for users
Access to new tokens: One of the most immediate consequences of the hardfork for users is the ability to get new tokens on a branched chain. If a user had a balance at the time of the hardfork, they automatically receive an equivalent number of tokens on the new chain. This may represent an economic benefit if the new tokens gain value in the market.
Need to update software: In order to continue transactions or mining after a hardfork, users must update their wallets, mining software and other tools to comply with the new network rules.
Security risks: New or less popular chains may be more vulnerable to attack, especially if much of the mining power remains on the original chain. For users, this may mean risks related to loss of funds or other security issues.
Choosing between chains: After a hardfork, users may face a choice between supporting the original chain, the new chain, or both. This choice may depend on personal beliefs, economic reasoning, or technical preference.
Market volatility: Hardforks are often accompanied by increased market volatility. This can present both risks and opportunities for users interested in trading or investing.
Interaction with services: Exchanges, wallets and other crypto services may react differently to hardforks. Some may be quick to support the new chain, while others may abandon it, or take a neutral stance. For users, this may affect access to their funds or the ability to trade new tokens.
Awareness: Understanding the causes, consequences, and technical details of a hardfork helps users make informed decisions. Lack of information can lead to loss of funds or other undesirable consequences.
Conclusion
In the context of blockchain and cryptocurrencies, a hardfork is not just a technical update. It is an event that can impact users' economic interests, security strategies, and even philosophical beliefs. Therefore, it is important to always be aware of upcoming changes and understand their possible implications.
A hardfork is a complex and multidimensional process that can have a profound impact on the technical, economic and social sides of a cryptocurrency project. It is always significant to keep in mind the possible risks and be prepared for the changes that a hardfork can bring.
