What is Merged Mining?
Merged mining, or Auxiliary Proof-of-Work, is the process of simultaneously mining two separate cryptocurrencies. Although not as prevalent as the Proof-of-Work or even Proof-of-Stake consensus algorithms, some projects have employed merged mining to use the existing structures off more secure networks as they develop.
How does Merged Mining work?
Every merged mining process involves an auxiliary chain and a more established parent chain. In order for two cryptos to be mined together, both chains must have the same hashing algorithm. To explain the process as simple as possible, we will be using the Namecoin and Bitcoin mining pair as an example.
In this case, Bitcoin is the parent chain while Namecoin is the child chain that is using Bitcoin’s network. Both cryptocurrencies have the SHA-256 hashing algorithm for mining.
Parent chain developers do not have to do anything in order to implement merged mining. Thus, the Bitcoin network doesn’t even have to be aware that Namecoin is mining in tandem with it.
However, auxiliary chains require some added development to be able to perform merged mining. As a result, Namecoin developers updated the blockchain to accept the same proof of mining as Bitcoin as and to make it valid on the Namecoin blockchain as well.
Merged Mining Process
Merged mining does not need miners to have additional computing power. As a miner, you mine both cryptos just as efficiently as you would when you mine only the parent coin. The miner just has to complete the additional set-up to support it.
You first start by gathering a block of transactions for each chain. The Namecoin (auxiliary chain) block includes a standard set of transactions, and the same applies to the Bitcoin block. However, it has an additional transaction containing a hash that points to the Namecoin block you just made.
There are a few different ways in which you can mine:
- You mine a block at the difficulty level of Bitcoin. When the Bitcoin block is finished it is then broadcasted to the Bitcoin network. Because the difficulty level of the Bitcoin block you just mined is higher than Namecoin’s difficulty level, you also mine a Namecoin block. This allows you to receive both mining rewards.
- You mine a block at the difficulty level of the Namecoin chain. You finish constructing the Namecoin block by introducing the header and hash of the Bitcoin block. The Namecoin blockchain accepts this block and recognizes the additional Bitcoin header and hash as your proof of work due to the development work you performed to support merged mining. You only get the Namecoin mining reward.
- You mine a block at a difficulty level situated between Namecoin’s and Bitcoin’s difficulty level. Same as the previous case, you will only have the Namecoin reward.
Merged Mining Repercussions
New blockchain projects have a few benefits if they implement merged mining. This protocol implementation enhances the security of their network while still allowing them to operate as a separate chain. These secondary chains will also receive more exposure through their association with a more popular blockchain.
Additionally, miners are more motivated to contribute as they receive extra rewards without investing more money in the process. And, because miners usually trade between the two coins to keep what they made, both cryptos will see a boost in liquidity.
Incorporating merged mining for the auxiliary chain will require some additional development. When a chain wants to switch from another mining protocol to merged mining, it will have to hard fork. And hard forking is also necessary if the chain wants to change its protocol from merged mining.
Miners and mining pools also have to put in more resources if they want to receive the rewards of mining both chains. Although merged mining doesn’t involve more computing power, it does, however, involve more maintenance.
When you mine two blockchains, the connections to serve and the distribution channels to maintain (for mining pools) are doubled. Some may see the added maintenance reasonable enough for the extra coin.
Coins with Auxiliary Proof-of-Work
Namecoin was the first coin to implement merged mining with Bitcoin. While now it is among the 300 positions by market cap, it used to be among the top 10 at some point. It shows that a project can slowly decline even when it is connected to the network of the most powerful cryptocurrency.
Even though there are plenty of mining pools supporting Namecoin’s merged mining, the coin hasn’t seen much adoption since its launch. The project is also not seeing as much development as its peers. This goes to show that a cryptocurrency which uses merged mining that doesn’t necessarily mean it will be for sure a profitable investment.
In the early days of Dogecoin, the community decided to implement merged mining with Litecoin. They discovered that the original mining mechanism would leave the network without significant mining rewards within the year. If no changes would be made, miners wouldn’t be motivated to mine anymore, and the network would be vulnerable to a 51% attack.
After the switch from Proof-of-Work to Auxiliary Proof-of-Work, the coin’s price went from nearly $0.0002 (~0.00000041 BTC) to $0.00047 (~0.00000115 BTC). That represents a 180 percent increase in BTC price in the span of a few weeks.
Although just one data point, this is proof that a project that implemented merged mining could represent a profitable short-term investment.
Elastos is an Internet network powered by blockchain which integrates merged mining with Bitcoin. With this coin does not have as much popularity, it may become an investment opportunity. Once the platform has finished implementing its merged mining, the Elastos price could go up just like Dogecoin did.
Merged mining is a tremendous opportunity for startups looking to develop without risking to be the target of a 51% attack. With the ever-growing threat of these types of attacks, we might see many more projects moving to merged mining appearing in the industry.