" class="no-js "lang="en-US"> A Short Guide to Bitcoin Forks - Fintech Finance
Tuesday, February 20, 2024

A Short Guide to Bitcoin Forks

For someone new to Bitcoin, it can be confusing navigating the Bitcoin market. Among other unfamiliar subjects, one might encounter different kinds of Bitcoin.

Isn’t there just one Bitcoin?

There is one original Bitcoin, usually denominated as BTC, which was created by anonymous founder(s) Satoshi Nakamoto in 2009. However, throughout Bitcoin’s history, there have been forks, or changes in Bitcoin’s code. Some of these forks have merely been software upgrades, while others have led to splits in Bitcoin itself. The latter is probably the most well known, with some Bitcoin hard forks leading to new types of Bitcoin, such as Bitcoin Cash, Bitcoin Gold, and other Bitcoin variations.

Technically, there are always Bitcoin “forks” happening. When two miners find a Bitcoin block, or group of Bitcoin transactions, at the same time, a blockchain “fork” happens. The “fork” ends when new blocks are added to one of the miner’s blocks and the other miner’s block is discarded (“orphaned”).

However, this guide will focus on what most people think when they hear about Bitcoin forks – forks that are introduced by members of the community (software upgrades, splits in the currency).

Soft Forks

While hard forks are more well known because of their potential to split Bitcoin into different cryptocurrencies, soft forks happen much more often. Bitcoin has been upgraded with soft forks on numerous occasions.

Soft forks are seen as having a lower risk of splitting Bitcoin than hard forks. By definition, soft forks are backwards-compatible software upgrades. For example, Bitcoin currently has 1-megabyte (MB) Bitcoin blocks. A soft fork to support 500-kilobyte (KB) Bitcoin blocks could be implemented. 500KB is smaller than 1MB. Bitcoin nodes (miners or non-miners who store the blockchain and broadcast the Bitcoin transaction information) using the “old” software still view the new 500KB Bitcoin blocks as valid since 1MB software already could support (smaller) 500KB blocks. However, the nodes that “upgrade” to 500KB blocks won’t see 1MB blocks from nodes that didn’t upgrade as valid, since 500KB software can’t support (bigger) 1MB blocks. As such, majority support (just from miners – doesn’t include non-miner nodes) is required for soft forks to work.

In this particular example, the 1MB software nodes must “upgrade” to the 500KB block software in order for the fork to be successfully implemented. If not, the minority’s blockchain can get orphaned. Or worse, a hard fork may result.

Hard Forks

While soft forks are software upgrades that are backwards-compatible, hard forks introduce something to Bitcoin that is not compatible with old software.

Going along with the blocksize example we chose, if a hard fork altered the blocksize from 1MB to 2MB, the new blocksize wouldn’t work with older software since 2MB is bigger than 1MB. Once a hard fork is implemented, nodes using old software must upgrade, otherwise all new transactions won’t work for them. Without full miner support, Bitcoin can fork into separate blockchains, one that supports the software upgrade and one that doesn’t.

User-Activated Soft Fork (UASF)

A user-activated soft fork (UASF) is a type of Bitcoin fork that doesn’t need miner support. UASFs can be activated with the backing of other key players in the Bitcoin ecosystem, such as exchanges, wallets, non-mining nodes, and so on.

The way UASFs work is by gaining the support of non-mining Bitcoin actors before it gets added to Bitcoin’s code. The new UASF software is then set to activate at a future predetermined date and is deployed on supporting nodes. The problem with UASFs is that they can take longer than hashrate or miner-powered soft forks and that if most miners don’t also agree to the UASF, they could split the network.

Examples of Bitcoin Forks

Soft Fork Example: BIP 16 (P2SH)

A soft fork that happened was BIP (Bitcoin Improvement Proposal) 16, which standardized pay to script hash (P2SH) transactions. BIP 16 allowed users to send Bitcoin to an address secured in atypical ways, such as one that requires multiple signatures for the user to spend the Bitcoin (multi-signature address).

Hard Fork Example: Bitcoin Cash

Bitcoin Cash is perhaps the most famous hard fork. Among members of the Bitcoin community, there has been disagreement on how to address the Bitcoin scalability problem. In other words, how to make Bitcoin more capable of handling more and more transactions cheaply and quickly as Bitcoin’s popularity continues to grow.

There are two main sides when it comes to the issue. One supports improving scalability “on-chain”, or improving scalability while still having transactions happen on the Bitcoin blockchain. The other supports improving scalability “off-chain”, or improving scalability while having some transactions happen off the Bitcoin blockchain (to alleviate stress on the blockchain).

The on-chain proponents disagreed with the off-chain proponent’s solutions, such as SegWit and Lightning Network, and instead chose to implement bigger blocksizes (an on-chain, non-backwards compatible solution), resulting in Bitcoin Cash.

User-Activated Soft Fork Example: BIP 148

UASF BIP 148 was an attempt to push through the SegWit software upgrade without miner support. SegWit had been attempted as a soft fork upgrade in the past but had never gained majority miner support.

Proponents of SegWit deployed BIP 148 in an attempt to push through SegWit without miner support. BIP 148 can be seen as one of the direct causes of the Bitcoin Cash fork, a miner-activated hard fork that symbolically was scheduled for the same day as BIP 148 (August 1, 2017). Some of the miners didn’t want SegWit, especially without their consent, which led them to activate the hard fork Bitcoin Cash.

Conclusion

Bitcoin forks can be hard to wrap one’s head around but are an essential element to how Bitcoin works and makes changes to its code, whether those changes are widely accepted or lead to disagreements and even splits in the currency.

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