With cryptocurrency, and consequently the crypto market, one of the most notable points is the possibility of, at any given time, making important updates and implementations in a crypto’s code. Such changes may or may not be communicated and they have several goals: increase security, add new dissemination resources and even increase/decrease the capacity to generate new currencies. Such events are called Hard Fork and Soft Fork.
Any network cryptocurrency can be updated and every change will make it so all the nodes (points that interact with the cryptocurrency in the network) enforce this crypto’s new version before interacting with the network again. Understanding these events is fundamental to comprehend specific tendencies and movements in these cryptocurrencies’ speculation through their respective crypto assets.
When crypto undergoes an update, the speculative market may show more enthusiasm or insecurity depending on the enabled implementations. Such modifications can only be applied by the cryptocurrency’s creators/managers. Because of the abrupt movements that may be caused by these events, some Exchanges can even choose to limit trades, withdrawals, and/or closing operations in crypto assets correlated to the ongoing Hard/Soft Fork.
Let’s understand the difference between the two update processes?
Hard Fork
A Hard Fork happens when the cryptocurrency undergoes a change in its source code and its respective algorithms. This update is then propagated between all the nodes that can process this cryptocurrency. However, while this update is taking place, we have the following scenario: there will be nodes capable of working only with the new update and nodes that will only be able to identify the cryptocurrency with the previous code. Therefore, we will have two versions of the same cryptocurrency coexisting in two ways (or forks).
Soft Fork
Similar to the Hard Fork, this one also occurs when a cryptocurrency is updated. However, these modifications are focused on generating only one version of the cryptocurrency, without fragments of the previous code incompatible nodes.
In both scenarios, such modifications can alter the usage method and the cryptocurrency’s distribution abruptly, besides being able to change the crypto’s goal completely. These modifications can be responsible for directly influencing the Hash Rate (capacity to generate new currencies) of a determined currency and consequently abruptly decreasing or increasing its speculative power:
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