What is a hard fork and what does it mean for your cryptocurrency holdings?
The technology that underpins cryptocurrencies is not understood by a lot of people, but you don't really need to fully grasp the idea of mining or know what a blockchain is in order to use them.
Whether you are a seasoned user of Bitcoin or any other cryptocurrency, you may be aware of an impending hard fork for Bitcoin Cash (BCH). The date for your diary is November 15, but just what is a hard fork, and what are the implications?
You can think of blockchain as a protocol -- just as HTTP is protocol for the internet that lets connected devices know how to communicate with each other -- and, put simply, a hard fork is a major update to this protocol. The important difference between a hard fork and a normal one (or a soft fork) is the backward compatibility implications.
While a normal fork might be a minor update that improves efficiency, it can also be something big. The important thing is that everyone making use of the blockchain agrees to the changes so it remains fully supported and transactions can continue uninterrupted. A hard fork is a little different in that it means there is not a consensus about the changes that have been made so, rather than just changing the blockchain and upsetting many people, a new blockchain is created so two -- or more -- then run in parallel. The problem that is introduced is that of backwards compatibility.
If a node does not support the forked blockchain, it means it is not able to process blocks. There are two ultimate outcomes here. It could be that the original protocol ends up being dropped, or it could be that the two forks end up running in parallel.
But why might a hard fork happen? There are several reasons. The first can just be a simple disagreement about how changes should be implemented; with no consensus a hard fork is often the only way forward. This may, inadvertently, result in the creation of a new cryptocurrency, but the purposeful creation of a new version of a cryptocurrency is a second possible reason for a hard fork.
Further reasons are shared by Investopedia:
There are a number of reasons why developers may implement a hard fork, such as correcting important security risks found in older versions of the software, to add new functionality, or to reverse transactions—as when the Ethereum blockchain created a hard fork to reverse the hack on the Decentralized Autonomous Organization (DAO). After the hack, the Ethereum community almost unanimously voted in favor of a hard fork to roll back transactions that siphoned off tens of millions of dollars' worth of digital currency by an anonymous hacker. The hard fork also helped DAO token holders get their ether (ETH) funds returned
The proposal for a hard fork did not exactly unwind the network's transaction history. Rather, it relocated the funds tied to the DAO to a newly created smart contract with the single purpose of letting the original owners withdraw their funds. DAO token holders now can withdraw ETH at a rate of approximately 1 ETH to 100 DAO. The extra balance of tokens and any ether that remains as a result of the hard fork will be withdrawn and distributed by the DAO curators to provide "failsafe protection" for the organization.
When a hard fork occurs, people have understandable concerns about what will happen to their money. Fintech startup Revolut recognizes these worries, saying:
There's always extreme uncertainty around such events, and therefore there are no guarantees that we will or will not support the introduction of new cryptocurrencies as a result of hard forks.
But what of the Bitcoin Cash hard fork specifically? Revolut says: "Your BCH will remain perfectly safe at Revolut throughout the fork. Although, it may experience price volatility. Our primary goal during this fork is to protect customer funds".