16.8.1. Review: What are Consensus Algorithms?¶

A consensus algorithm is a method by which a distributed ledger is updated (that is, a new block is added to the block chain), and all parties come to agreement that this did happen. There are several implementations of a consensus algorithm including proof of work and proof of stake. Proof of work is where blocks are added by mining: computers guessing at algorithms to find the correct one and add a block to the chain. Proof of stake is similar to gambling where you invest a percentage of your coin to be randomly chosen for a validation committe and in that committee, members add new blocks to chain and approve transactions. For more information, see consensus.

16.8.2. What is a Hard Fork?¶

Another risk to consensus algorithms like proof of stake and proof of work is hard forks. Hard forks might be caused by a change in the blockchain’s technology. Hard forks might result in blocks that had previously been validated becoming invalid, while other blocks might become valid by adding them to the chain. These forks can be started by developers or miners who are not satisfied with the current progress of the blockchain. They also are a way to fund projects.

Specifically, hard forks are caused by additions to block code that causes a new path with an upgraded blockchain. This fork causes two paths in the blockchain to appear for miners or validators. A fork like this can occur in any form of cryptocurrency that is based on blockchain. When a fork occurs, the miners, validators, and forgers of a particular coin must follow the changes since when a fork occurs, developers update the base code of blockchain to match the new networking rules. Hard forks can be implemented to undo damage caused by a hack (i.e. reversing transactions), adding new functionality (such as changing the consensus algorithm), and patching security risks.

16.8.3. What are the Effects of a Hard Fork?¶

Hard forks are in contrast to soft forks, which allows one side of the fork to continue to exist, removing the choice of path a miner can take in a hard fork. Hard forks effectively create a new cryptocurrency, while soft forks do not. Although these changes can be beneficial to blockchain users, they can cause a blockchain to become unstable. This is because hard forks can result from disagreements from within the cryptocurrency’s community. Forks can result in price inflations as well, raising the cost of the coin. In addtion, in some cases, adding a hard fork can introduce vulnerabilities into the cryptocurrency. An example of this happened to Ethereum in 2019. A fork was introduced for Ethereum, which caused issues with smart contracts. The Constantinople fork was proposed in increased vulnerabilities within the smart contracts. The hashing algorithm within these contracts became repeatable and thus, increased the chances of a hacker accessing the information within the contracts.

16.8.4. How a Consensus Algorithm Influences a Hard Fork’s Effect¶

In the case of a hard fork for the proof of work algorithm, the miners must decide whethere to continue in the current path, or join the new blockchain. If the miner decides to choose to continue to support both chains in the fork, they must divide their resources between the two chains. Since the computing power is divided between the two chains, there is reduced resources dedicated to a chain or more strain on the computers they use to mine coin. In general, a fork is discouraged for proof of work systems because this causes more of an impact on the value of the currency by decreasing it and the developers of the cryptocurrency would need to choose the fork that does not cause vulnerabilities in the code base.

In proof of stake algorithms, forking is part of the validator’s job. A validator must choose which block is beneficial to the cryptocurrency. If the validator chooses the wrong side of the fork, leading to vulnerabilities, the validator would lose their stake. However, unlike proof of work systems, a validator does not have to choose one block. There is not as much of a computational cost with maintaining a fork, the validator can choose to support both directions of the fork. Because of this, forking is more prevalent in proof of stake systems than in proof of work systems and makes people worry about the stability of the cryptocurrency.