Hard forks and soft forks are software updates to the blockchains of cryptocurrencies like Bitcoin. Crypto coins are built on blockchains that run according to a particular set of programmable rules called protocols. These protocols function as the DNA of blockchains, operating on a decentralized network made up of nodes run by network participants. This cryptocurrency "DNA" contains information on mining, block sizes, voting standard, and more. Yet just like any piece of software, protocols need to be updated. Such updates are done via hard forks and soft forks.
Hard forks are blockchain protocol updates that split a coin, like Bitcoin, into two separate blockchains. This usually occurs because a large part of a network's participants and blockchain developers may have differing ideologies on the future of the cryptocurrency. These can sometimes result in controversy and much debate.
For example, in 2017, a hard fork of Bitcoin's blockchain occurred, which gave birth to Bitcoin Cash. Since there is no centralized authority managing Bitcoin, miners and developers had to vote on changes to the protocol. Since no unanimous consensus could be reached, a hard fork occurred. Led by Roger Ver, this was the inception of Bitcoin Cash.
When a hard fork is implemented on a cryptocurrency's blockchain, all of the participating nodes must update as well. Those that do not will no longer be compatible with the newly updated version of the coin. Nodes that don't perform the update will lose the ability to facilitate and process transactions or add blocks to the chain.
For example, let's say that during a Bitcoin's hard fork block size is increased from 1MB to 3MB. If an old node tries to push a former sized block into the updated blockchain protocol, it will be rejected.
While communities and blockchain development teams may use hard forks to split over irreconcilable ideologies, this is what ultimately drives innovation.
Soft forks are also changes to the protocol of a cryptocurrencies like Bitcoin, yet unlike hard forks, the changes are compatible with older versions of the blockchain. Therefore, nodes that choose not to update to the latest version of the blockchain will still be able to actively participate in Bitcoin's network as long as they follow the rules of the new chain. Since only 51% of participants and node operators need to upgrade, soft forks tend to have less tumultuous effects on Bitcoin's network or that of any cryptocurrency.
For example, if Bitcoin's block size of is raised from 1MB to 3MB, non updated nodes can process any block size up to 3MB. However, they are not able to go above the 3MB limit.
In order for any network changes to occur, there needs to be an agreement between (at least a majority) of Bitcoin miners and developers supporting the Bitcoin network. If blockchain developers cannot convince Bitcoin miners of a proposed change, miners can refuse to upgrade their software. If blockchain developers were to push forward with an update against the unanimous wishes of miners, miner nodes would no longer be able to operate on the new blockchain. If all miner nodes are no longer compatible, then Bitcoin's network would cease to exist and fail. For a protocol like Bitcoin that is worth billions of dollars, questions of changes and updates need to be carefully considered and analyzed before they can be implemented. Furthermore, the update process can often take months, if not years.
The incentive structure of blockchains often prevents the desire to do so. Most Bitcoin miners have a greater interest in preventing a Bitcoin hard fork from occurring on its blockchain network as they get rewarded in Bitcoin. Hence, if you have been a Bitcoin miner for years and got paid in Bitcoin, you want to ensure that Bitcoin maintains its value and network integrity.
Ultimately, hard forks and soft forks are the fuel of innovation for cryptocurrency coins like Bitcoin and Ethereum. They facilitate an open-source culture of continuous improvement and encourage innovation. The economics built into coins and tokens also ensure that such events are not done callously and with little thoughts. Additionally, since software development cycles are typically quite long, meticulous roadmaps and responsive strategies are required. Since cryptocurrency projects are open source, thousands of developers are bound to have different opinions on how things should be done. Therefore it can be expected that hard forks and soft forks will continue playing major roles in the space.