What is a hard fork? A hard fork is when an update is made to the protocols of the blockchain. Put simply, a hard fork is a change in the way Bitcoin works. A hard fork differs from a soft fork. In a soft fork, everything is backward compatible. An example of a soft fork would be Microsoft Office 2016. Older versions of documents created in previous versions of Microsoft Office are still compatible, but there are new distinct features of the software. An example of a hard fork would be the XBox One. None of the games that work for XBox 360 would work for XBox One and vice versa.
Issues of Scalability
Hard forks are a major change in the overall protocol of the current blockchain. Most often, these hard forks seek to address Bitcoin’s issues of scalability by increasing the block size. One block size of 1mb allows for only 4.4 transactions per second. While this may sound like a lot, with millions of transactions occurring this transaction speed fails to keep up. By not keeping up with transactions, this reduces the options for scalability of the network and also keeps the average person out of Bitcoin due to high transaction fees. A transaction with a block size of 1mb on the Bitcoin blockchain can take up to twenty minutes to go through with transaction fees sometimes as high as twenty dollars. This keeps Bitcoin from becoming a “real” currency, the type used every day by millions of people. I mean, who’s going to wait twenty minutes at the register in Starbucks just for their transaction to go through?
How to fix it?
An iPhone gets updated by Apple. No other entity or individual can roll out an update for all iPhones besides Apple. When this update happens, the user has one of two options; accepting the update or not accepting the update. If a user disagrees with the update, there isn’t an alternative update for them to install. Unlike an iPhone update, a change to the way in which Bitcoin works cannot be issued by a single central authority like Apple because within Bitcoin, there isn’t one. When a change to the protocol is created, nodes and mines have the option of either agreeing to it or not. This creates two blockchains, one with the original protocols and one with the updated protocols. The official Bitcoin blockchain is determined by whichever one has the most miners and nodes behind it.
A similar disagreement over bit size in August 2017 led to the creation of Bitcoin Cash. About twenty percent of users opted into a User Activate Hard Fail which created an entirely new blockchain or to put it another way, an entirely new cryptocurrency. There are of course key similarities between the two cryptocurrencies, but they were different in fundamental ways. The key difference perhaps between the hard fork that created Bitcoin Cash and the hard fork that awaits with SegWit2X is that Bitcoin Cash did not have the backing of the mining community.
In the infamous New York Agreement, a group of fifty-eight signatories agreed to increase the block size. Some against the hard fork say that it changes the protocols without gaining much and risks the decentralization of Bitcoin. See, even though Bitcoin is a decentralized currency, a large portion of the mining power, the very thing that powers the blockchain, is consolidated into a very small number of people. The fifty-eight signatories to the New York Agreement represent 83% of mining power. Without all this mining power though, Bitcoin will become even slower and transaction fees will become even higher.
The SegWit2X hard fork was delayed and originally lost some support due to its lack of replay protection. Replay protection is very simple. Imagine if you go the bank and deposit $500. The next day, the bank splits into two separate banks. Each bank uses the original ledger. You go to both banks and withdraw $500 from each. In reality, you withdrew $1,000, but because the banks had no replay protection, you were allowed to withdraw your funds twice. It’s quite easy to see how this could be problematic. The original SegWit2X hard fork had no replay protection, making wallets and trading platforms scramble to figure out their own form of protection against replay attacks, but to go back to our example, even if one of the banks had some sort of replay protection, both banks could still be affected by a replay attack.
What Happens Next?
If an alternative blockchain is created, the blockchain that gets the most users and miners will come to be considered Bitcoin. The alternative chain will be considered something else like Bitcoin Gold or Bitcoin Cash is now. This is considered a threat by the Bitcoin community to the entire network because of its possibility to break Bitcoin apart into two separate blockchains and consequently two separate currencies. Only time will tell what ends up happening.