It is no news that a cryptocurrency system can be identified as software. Similar to the dynamics of the software on our phones which needs to be updated from time to time, the software for cryptocurrencies requires an update.
However, the changes are achieved based on the miners’ votes using the software. A miner’s vote is cast and processed anytime a block is successfully mined. Cryptocurrencies can split up in the event of a lack of clear consensus after the votes have been counted. It is from here that the process of “forking” comes to light.
What Is A Soft Fork?
Often, soft forks are defined as being backward to compatible. In essence, they can be described as being a temporary split that is nuanced in comparison to hard forks. The broad rules which govern the acceptance of a block to the blockchain network are changed when soft forking occurs.
Backward compatibility in soft forks means that the new rules, which are also included in the latest version are a subset of the pre-existing rules. For instance, if the speed limit on a road was changed from 45 miles per hour to 70 miles per hour, it shows that people driving below 45 miles per out would still have to obey the rules.
Therefore, old rules remain valid even after new blocks have had new rules.
Meanwhile, the opposite of this may not stay true, as blocks mined under the old rules framework may/may not be acceptable under the new rules.
This continuous change poses less disruption to the blockchain. This is because the nodes don’t need to change all blocks that are mined already to stay valid following the emergence of a new framework. But its acceptance concerning the new rules is automatic.
Meanwhile, every node used in processing the blocks needs their software to go through a routine update to ensure continuity in coins processing. As the follows a longer chain, the longer chain is considered a valid chain after the upgrade of the system.
Another feature about soft fork is the lack of necessity for every node on a network to agree. This is due to the validity of the old version of the software being enabled to keep up with mining. Technically, changes made by soft forks can be reversed. This translates to needing a hard fork for the reversal, and as such has severe consequences.
What Are The Financial Impacts Of A Soft Fork?
Forks are capable of significantly impacting the value of cryptocurrency. This is feasible with the major change its fundamentals undergo.
1. There is a likelihood for the asset value to fall when a wrong attempt is made by the miners with the introduction of a soft fork. The effect of this move lies in the market perception of the mining community with the portrayal of rigidity and hostility, hence dropping the prices.
2. The amount of volatility is not too high as soft forks are not contributory to a blockchain split.
3. When the case of a soft fork arises, the major change maybe towards the consensus mechanism of the currency or the security network. Based on the favorable or unfavorable perception from the market, the changes may make the currency more or less valuable.
Soft forks do not have a disruptive capability as hard forks, but their impact on the financial viability of any cryptocurrency is significant. So crypto investors must have a thorough understanding of how soft forks work.