What is a Hard Fork ?
A hard fork is not backward-compatible. It leads to the creation of two separate and distinct blockchains, each with its own set of rules and functioning independently of each other. The new blockchain will not recognize the transactions made on the old blockchain, and vice versa. This can lead to a split in the network, with some participants continuing to use the old blockchain and others switching to the new one. The best example is the Ethereum fork, which gave birth to the blockchains Ethereum Classic and Ethereum as we know it today.
What is a Soft Fork ?
A soft fork is backward-compatible. It only changes the rules of the blockchain in a way that the new version is still compatible with the old version. This means that transactions made on the old blockchain are still valid on the new blockchain, but transactions that violate the new rules will be rejected by the network. It does not result in the creation of a separate blockchain, and the network continues to function as a single entity.
Why do Forks Happen in Cryptocurrency?
Forks in cryptocurrency happen for several reasons, including:
- Upgrading the technology: The objective to upgrade the technology of a blockchain network and add new features or improve security.
- Fixing security vulnerabilities: They can also be used to fix security vulnerabilities in the existing blockchain protocol.
- Resolving disputes: It can happen to resolve disputes within the community regarding the future direction of the blockchain.
- Changing consensus mechanism: Changing the consensus mechanism of a blockchain, for example, from proof-of-work to proof-of-stake requires a fork.
How do They Affect Cryptocurrency Prices?
The impact on the price of a cryptocurrency can vary, depending on several factors such as the size of the network, the level of support for the new blockchain, and the perceived value of the changes being made. In some cases, forks can lead to a significant increase in the price of the cryptocurrency, while in others, it can lead to a decline.
What is the Difference Between a Hard Fork and a Soft Fork?
The main difference between a hard fork and a soft fork is their backward compatibility. The former creates two separate and distinct blockchains, while the latter only changes the rules of the existing blockchain in a way that it is still compatible with the old version.
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