When one of these upgrades becomes available, nodes (devices) on the network don't have to implement it, and if they choose to take this route, they may still be able to accept blocks mined by nodes that have upgraded their software. However, if a soft fork takes place, the upgraded nodes will not accept blocks produced by nodes that failed to upgrade.
A network can execute a soft fork for many different reasons, such as potentially fixing technical glitches, changing the transaction format or upgrading a digital currency's protocol to allow for more transactions.
Like hard forks, soft forks require the approval of a network's majority to take place.
One example of a soft fork is Segregated Witness (SegWit), which the Bitcoin network implemented in August 2017. SegWit improved the Bitcoin network by allowing it to process a greater number of transactions without increasing the size of Bitcoin's blocks.
Before this upgrade took place, this network could process seven transactions per second. After the network implemented SegWit, individual Bitcoin transactions took up far less space than they did before, meaning that each individual block could include more of them.
It is worth keeping in mind that while miners are not obligated to upgrade their software when a soft fork takes place, their failure to update can cause problems in the network. If nodes fail to upgrade, they could potentially breach consensus rules, provoking a temporary split in the network. As a result, the more nodes there are that implement a soft fork, the more secure a network will be.
A soft fork represents a change in a network's protocol that is potentially compatible with the old rules. As a result, nodes that refrain from implementing a soft fork may be able to accept blocks mined using the new rules. Nodes that have upgraded, however, will not be able to accept blocks mined using the old rules.
Soft forks can be executed to fulfill a wide range of purposes, including solving basic technical problems and changing the transaction format of a digital currency. Also, in order to implement one of these upgrades, the consensus of the network is needed.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…