Each blockchain has a protocol which is made up of code to define the connection, the mining and transaction rules. To be part of the blockchain network, everyone using it must comply with the protocol. A hard fork is when there is an upgrade to the protocol. For a hard fork to take place, all users or nodes need to upgrade to the latest version of the protocol software. One of the main reasons a hard fork occurs is so the code can be updated to rectify any vulnerabilities.
When a hard fork occurs, users can benefit from the creation of the new asset, which is the result of the fork. For example, if hardfork is happening to ETH, and the new asset created from ETH hardfork is ETH Classic. User holding 1 ETH will get 0.1 ETC, this is one of the benefit if users are holding on to ETH. These new assets can then be traded or held with the hope the price will rise.
Forks can happen due to many reasons. Here are the most important ones:
- to fix important security risks found in older versions
- to add new functionality
- to reverse transactions
Hard forks have both positive and negative impacts on the development of digital assets systems.
Well-conducted hard forks solve current network problems which slow down its work
Hard forks that lead to the creation of a new digital asset are welcome by the community because they provide free coins to balance the issuance
Hard fork often causes a split in the community of digital assets enthusiasts
It can bring on high volatility