The software needs to be updated, improved or adapted to new rules. Fork is just that in the world of blockchain and cryptocurrencies.
What is cryptocurrency fork?
Fork is an event in a blockchain, where the main chain is duplicated with a change on it (a change in the protocol). The blockchain spreads over two paths. This can happen because of the transaction history or a new rule that decides on the acceptance of the transaction. Both paths can function without collision, but the longest lasting chain that will be used by more people (both paths can be used, but it is not possible to transfer a crypto from one path to the other). For example, more and more people are moving away from using Bitcoin Cash due to the constant decline in its popularity and trust among users. All network participants must follow the same rules to continue to participate in a given blockchain. The set of rights/rules through which a network operates is called a "protocol".
What are the types of forks?
There are two types of forks that are very similar to each other. Soft fork is the agreement of most nodes, and hard fork is the agreement of all nodes.
Soft fork is the so-called protocol adaptation to the current conditions in a given blockchain or crypto. An example can be the fine-tuning of details related to the size of blocks or a minor change in the characteristics of the transaction. The vast majority of network participants should be in favour of such a change to make the soft fork.
Hard fork, on the other hand, is the creation of a new chain that has the same history as the original chain, but there are changes in the protocol that must be accepted by the whole network. Hard fork occurs when nodes of a newer version of blockchain do not accept the previous protocol. Adding a new rule to the code creates hard fork.
What are the reasons for introducing forks?
There are many reasons why developers developing a given blockchain implement forks. First of all, they are guided by bug fixes such as improving security in older software or adapting the network to the current state of scalability.
Soft and hard forks are basically the same - in the sense that after changing the existing cryptographic platform code, the old version (e.g. bitcoin) remains in the network while creating a new one (e.g. bitcoin cash). In the case of soft fork, the fork has only one blockchain (i.e. the whole network is updated), while hard fork duplicates the old blockchain and creates a new one - there are two networks then. Although it is mainly up to network users which chain will be the most popular.
Are the other cryptocurrencies forks of bitcoin?
Many cryptocurrencies are based on bitcoin source code, but they do not have the same transactional history and are not derived from its blockchain. In some cases, the only similarity is the basis of the protocol, but it has been significantly modified by developers. Examples of such cryptocurrencies are: Dash (DASH), Litecoin (LTC) or Dogecoin (DOGE).
How to recognize hard fork?
Hard forks are big events, they aim to take users on their blockchain from the parent chain. They often offer free cryptocurrencies, when users receive 1:1 forked cryptocurrencies. Most forks add an additional segment to the original name, such as bitcoin gold, bitcoin diamond, bitcoin satoshi vision or ethereum classic.
From the investment point of view one has to watch out for new hard forks, because often the project itself is very popular in the first days, which may turn out to be wrong. In the following days, the beneficiaries of the forked crypto sell it on the stock exchanges, which causes the liquidity and exchange rate to fall, due to the drop in interest.