Any software needs constant updates to fix issues or increase performance. In the world of crypto, those updates are called “forks.”
Since cryptocurrencies are decentralized networks, all participants in the network - known as nodes - need to follow the same rules in order to work together properly. That set of rules is known as a “protocol.”
There are two types of fork in crypto: soft forks and hard forks. But both kinds of fork fundamentally change how the protocol of a cryptocurrency works.
A soft fork is a change in a cryptocurrency protocol which is backward-compatible. That means that non-updated nodes are still able to process transactions and push new blocks to the blockchain, so long as they don’t break the new protocol rules.
Imagine a soft fork which makes a new rule lowering block size from 3MB to 2MB. Older nodes will still be able to process transactions and push new blocks that are 2MB or less. But if an older node tries to push a block that is greater than 2MB to the network, newer nodes will reject the block because it violates the new rules. That encourages older nodes to update to the new protocol since they aren’t as efficient as the updated ones.
A hard fork is a change in a cryptocurrency protocol which is incompatible with the previous versions, meaning that nodes that don’t update to the new version won’t be able to process transactions or push new blocks to the blockchain. Hard forks can be used to change or improve an existing protocol, or even to create a new, independent protocol and blockchain.
Imagine a change in a protocol which increases the block size from 2MB to 4MB. If an updated node tries to push a 3MB block to the blockchain, the older, non-updated nodes will not see this block as valid, and they’ll reject it.
Depending on the situation, hard forks can either be planned or controversial.
In a planned fork, participants will voluntarily upgrade their software to follow the new rules, leaving the old version behind. The ones who don't update are left mining on the old chain, which very few people will be using.
But if the fork is controversial, meaning that there’s a disagreement within the community about the upgrade, the protocol is usually forked into 2 incompatible blockchains - 2 different cryptocurrencies. Both of the blockchains will have their own community, and the developers will progress in the way they believe is the best.
Since a fork is based on the original blockchain, all transactions from the original blockchain are also copied into the new fork. For example, if you have 100 coins of a cryptocurrency called Coin A, and a hard fork based on that cryptocurrency creates a new cryptocurrency called Coin B, you’ll also get 100 coins of Coin B.
Due to the open source nature of cryptocurrency and as more individuals and organizations with differing goals enter the crypto space, forks will continue to be integral to the development of cryptocurrency.