Why is the $old_instance needed for the widget update function?

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As the comment says, you should validate the values of the new instance. What happens if one of these values is invalid? You can either set a predefined default value or use the value from the old instance, because that must be valid.

So a very simple update code could look like this:

function update( $new_instance, $old_instance )
{
    return array_merge( $old_instance, $new_instance );
}

There is no better way to get this information, so WordPress just passes it along in case you need it. But you are free to ignore it completely.

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