Blockchain forks: What are they???

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Blockchain forks: what the fork are they?

With the Ethereum merge from proof of work to proof of stake happening in a few days, more and more people are wondering what a blockchain fork even is. Let me lay it out for you in a simple way.

In the simplest terms, a fork refers either to a software update to a blockchain network or when two incompatible blocks are mined, splitting the one chain into two. These things can happen for a few reasons.

First, a fork can take place on accident when two miners mine blocks almost simultaneously. The blockchain protocols are able to resolve this by abandoning the shorter chain when one side grows longer than the other. The abandoned blockchain’s blocks are referred to as “orphan,” “uncle,” or “ommer” blocks.

A fork can also occur purposely when updates are made to a blockchain’s protocol, potentially diverging into two paths forward. When an update is proposed to the nodes running the blockchain, they can either upgrade and accept the changes or ignore them. If any of the nodes reject the changes, depending on the change to the protocol, either a hard or soft fork will occur.

Hard forks

A hard fork describes when a change is made to a blockchain’s protocol that is incompatible with the original protocol. In this case, the chain splits and the two chains continue on in parallel, independent of each other. The two chains share their full transaction history and state up until the mined blocks diverge.

An example of this was when Bitcoin Cash forked from the Bitcoin blockchain in 2017. To increase Bitcoin’s transaction throughput, some core developers wanted to increase the maximum block size from 1MB to 8MB. Because most nodes were specifically configured to mine a 1MB size block, they wouldn’t be able to easily accept this fundamental protocol update to mine the 8MB blocks. The block size debate became quite political and ended up with the smaller group of 8MB supporters deciding to implement the upgrade and create a hard fork from Bitcoin into Bitcoin Cash without forcing the whole Bitcoin community to agree.

In the US, the IRS has issued guidance regarding the tax implications of a hard fork in Rev. Rul. 2019–24. This says that if you receive a new coin as the result of a chain-splitting hard fork, the receipt of those coins is income — with the amount of income equal to the value of the coins at the moment of receipt.

How does a hard fork differ from an airdrop? A crypto airdrop is a transfer of free cryptocurrency into users’ wallets. These coins live on an existing blockchain that a user is already transacting on. Although both airdrops and hard forks can result in a user obtaining new cryptocurrency, they are fundamentally very different events.

The Ethereum merge to proof of stake will result in a non-backwards compatible software upgrade. If miners choose to carry on running the proof of work software, a hard fork will occur and the two chains will carry on separately from each other.

Soft forks

A soft fork is an event when an upgrade to a protocol is released, but it’s backwards compatible. This means that the two versions of the protocol can coexist together and either version of the software can be used for the nodes of the blockchain network.

A soft fork happened on the Bitcoin blockchain on August 23, 2017 with the Segregated Witness (SegWit) protocol upgrade. SegWit improved the scalability of Bitcoin by allowing for more transactions per block. It does this by changing the transaction format where the “witness” information is removed from the input field of the block, instead storing that information outside the base transaction block.