IFC Markets
Questrade - Empowering you to take control of your financial future. Join the journey!

What is a fork in Cryptocurrency?​

 A "fork" is one of the most fundamental and confusing concepts for newcomers in the Cryptocurrency world.

Here is a straightforward explanation of what a fork is in Cryptocurrency, why it happens, and the two main types:

What is a Fork in Cryptocurrency?

In the simplest terms, a fork is a change in the rules of a blockchain network.

Think of a blockchain like a public, shared ledger written in a specific programming language with specific guidelines. A fork occurs when the developers or the community decides to update that language or change those guidelines.

Since a blockchain is decentralized, every participant (node) must agree on the same rules (protocol) to validate transactions and keep the chain moving. A fork is when some nodes start using a new version of the software.

The Analogy: Changing a Cookbook

Imagine a globally famous shared Cookbook (the protocol).
  • All cooks (nodes) must follow the exact recipes (rules) to make a valid dish (block).
  • A fork is when the community decides to update the Cookbook.
The two main types of forks depend on how drastic the changes are:

1. Soft Fork (The Minor Update)

A soft fork is a backward-compatible change. This means the new rules are stricter than the old ones, but nodes running the old software will still recognize and validate blocks created by the new software.

How it Works:
  1. The Change: The community agrees to add a new, non-essential rule (e.g., "From now on, all transactions must also include a date stamp").
  2. Compatibility: Nodes that update to the new software enforce this rule. Nodes that don't update still see the new blocks as valid because they never had a rule against date stamps.
  3. The Result: Only one blockchain continues to exist.

Analogy: Updating a Cookbook to say, "From now on, all dessert recipes must use organic sugar." Cooks with the old book can still read and validate the new recipe blocks, even if they don't know why organic sugar is suddenly required.

Example: The Segregated Witness (SegWit) upgrade on Bitcoin was a soft fork.

2. Hard Fork (The Split or Divide)

A hard fork is a non-backward-compatible rule change. This is a radical change that makes blocks created by the new software invalid according to the old software, and vice-versa.

How it Works:
  1. The Change: The community proposes a major change (e.g., "We are going to double the size limit of every block").
  2. The Split: Since the old software cannot process blocks that are too large (because it believes they violate its rules), the network divides into two separate chains at the point the fork occurs.
  3. The Result: Two entirely separate cryptocurrencies are created, running on two separate networks, each with its own community and market value.

Analogy: Updating the Cookbook to say, "We are changing the metric system to the imperial system for all measurements." Cooks running the old metric book cannot read and validate the recipes in the new imperial book, so they split off and create a new restaurant chain (a new blockchain).

The Coin Split and AirdropWhen a hard fork occurs, anyone who held the original coin instantly owns the same amount of the new coin on the new chain.
  • Example: If you held 10 units of the original coin (let’s call it "Chain A Coin") right before the split, after the fork, you would have 10 units of Chain A Coin and 10 units of the new coin ("Chain B Coin").

Major Historical Hard Fork:
  • Ethereum (ETH) vs. Ethereum Classic (ETC): This split occurred in 2016 following a major hack. The community disagreed on whether to "roll back" the chain to reverse the hack. The majority that reversed the chain became Ethereum (ETH). The minority that insisted the chain should never be altered became Ethereum Classic (ETC).

How a Fork Happens Technically
​
  1. Proposal – Developers or a governing body publish a Bitcoin Improvement Proposal (BIP), Ethereum Improvement Proposal (EIP), or similar document describing the change.
  2. Testing – The change is tested on testnets or private networks.
  3. Signal – Miners/validators signal support (e.g., by setting a flag in the block header). In Bitcoin, a “BIP9” miner signaling threshold (usually 95 % of hash power) determines whether the fork activates.
  4. Activation Height / Time – A specific block number or timestamp is set for the fork to become active.
  5. Execution – On the activation block:
    • Soft fork: Nodes that upgraded enforce the stricter rules; non‑upgraded nodes still accept the blocks but may ignore the new features.
    • Hard fork: Nodes that upgraded reject blocks that don’t follow the new rules; nodes that stay on the old software reject blocks that follow the new rules. The split is immediate.