There are two types of fork we need to look at, hard forks and soft forks, but first let’s understand what a fork is.
Fork defined: In the cryptocurrency world a fork is when a there is a change in the rules of the blockchain that the coin operates on or the nodes disagree on a historic transaction(s).
Think of a hundreds of people walking down a road and the road comes to a fork, some people may decide that they do not want to follow the traditional direction of the masses and take the other route — as they believe it to be better. This would split the crowd and others may follow. In terms of cryptocurrency the minority of followers would create a new coin (think of Bitcoin Gold, Bitcoin Cash).
Soft forks are quite common, in the rare cases when two or more miners validate a block at the same time they will each product their own hash (verification code) for that block. This often gets resolved as the next block is added to the blockchain and then the nodes can verify that this chain is the longest and most valid chain, rendering the other chain invalid.
Hard forks are intentional and are imposed by the developers of a blockchain. The developers impose a hard fork to change the rules of the blockchain. Bitcoin is on an open source blockchain, therefore developers can impose changes at any time. There are 2 ways a hard fork can go:
1. The majority of nodes do not agree with the new rules and continue as normal. If the fork occurred and a percentage of nodes did follow the new rules, the majority would reject their blocks and force them to create their own coin(take Bitcoin Gold for example).
2. The majority of nodes agree with the change in rules and the nodes that run the existing rules are forced to either change rules or they fork off and create a new cryptocurrency (see below).
(http://www.investopedia.com/terms/h/hard-fork.asp with a few additions)
A great example of hard forks in action is the Ethereum / Ethereum Classic fork.
To put a long story short, a smart contract was built on the Ethereum blockchain called Decentralized Autonomous Organization (DAO), which acted like a venture capitalist for the blockchain. Many users sent their ETH to DAO to fund projects, DAO raised over $150M worth of Ethereum and then this smart contract got hacked and the hackers stole a lot of Ethereum.
This resulted in a solution to create a smart contract that refunded the investors of this smart contract their original ETH balance.
This caused an argument among the community, one side way saying that it was not right to interfere with the code and that refunding the ETH to the investors could damage the price of ETH in the future. The other side were arguing that it is an ethical response and that they did not want such a large amount of ETH in malicious hands. So, the hard fork happened and Ethereum classic (old rules) was created (refer to the pic above).
To conclude, a soft fork and a hard fork can both be beneficial for the long term survival of cryptocurrencies, as they need to be improved and updated. However, some hard forks (like Bitcoin Gold) can be malicious and have only the developers financial interests in mind.
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