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Merged mining simply means the process of mining two or more cryptocurrencies concurrently using the same mining resources without impacting on the overall mining performance on the Blockchain of either coin. Merged mining is one of the burning topics among stakeholders in the Bitcoin ecosystem because it could potentially solve some of the biggest scalability challenges of the cryptocurrency.
Interestingly, Satoshi Nakamoto had earlier outlined the idea of merged mining about a decade ago in a post on BitcoinTalk. In his words, I think it would be possible for BitDNS to be a completely separate network and separate blockchain, yet share CPU power with Bitcoin. The only overlap is to make it so miners can search for proof-of-work for both networks simultaneously.
Satoshi was a person way ahead of the times and now the Blockchain industry is starting to experiment with the idea. This piece examines the core features of merged mining to establish its potential impact in helping the Bitcoin network scale sustainably from a trader and investor POV.Heres how Merged mining potentially improves the Bitcoin network
Merged mining allows blockchain projects to leverage existing computational resources on a single robust and resilient network instead of running small fragmented networks in silos for individual projects. The biggest security concern surrounding Blockchain technology especially in projects running the Proof-of-Work consensus is the risk of the 51% attack.
A 51% attack occurs when a malicious player succeeds in owning enough hashing power that gives them the ability to control a Blockchain. Blockchains are typically run on decentralized nodes but the decentralization could be lost in an instant if someone manages to control more than half of the nodes in a network.
Smaller blockchains are always at risk of such attacks and the risk often posses the classic chicken and egg dilemma for innovators. Investors wont back a small blockchain because it is at risk of chain integrity attacks and the lack of investor funding makes it add to invest in resources that make the network ecosystem attractive enough for other stakeholders such as developers and miners.
With merge mining, smaller blockchain projects use an Auxiliary Proof-of-Work in which each Blockchain trusts the other Blockchains work and accept such work in the confirmation of transactions, verification of data, and mining new blocks. Hence, either the parent chain or the auxiliary chain can solve the cryptographic problem to find a solution and add the block depending on the difficulty level at which the miner solves the hash.
Blockchain projects can attract Bitcoin miners with the lure of additional revenue streams without an increase in operational costs. The Bitcoin miners will in exchange deploy their mining resources to securing the auxiliary chains to provide the new projects. In the final analysis, merge mining provides a win-win-win situation for the Bitcoin network serving as the parent chain, the miners that secure the network, and the auxiliary chains that piggybacking on an established network to drive the success of their project.
One of the major criticisms of merged mining is that it could expose the parent Blockchain to bloat from the auxiliary chains. Even though parent chains are technical independent of auxiliary chains, parent chains will still need to run the coin daemons of the auxiliary chains in the background. Hence, if such chains become abandoned (as some crypto projects eventually are), the parent chain might be bloated by the outdated and buggy chains taking up disk space, CPU cycles, bandwidth, and memory space.
Secondly, while merged mining doesnt necessarily require additional computing power, it requires more maintenance effort because mining pools need to deal with 2X more connections and 2X more distribution channels. Hence, theres always the risk that miners will go rogue if the vision of the network is not properly aligned with the incentive for miners.
From a cryptocurrency trading or investment standpoint, merged mining doesnt provide any direct utilitarian value. Bitcoin traders and investors typically do not have any reasons to be concerned with technical details such as bitcoin mining fees, Latency, Maximum Throughput or Cost per Confirmed Transaction.
Nonetheless, your understanding of how merged mining works when combined with other information such as the long-term scalability of Bitcoin could help you form a more informed opinion about the prospects of cryptocurrencies in the grand scheme of things.
Also, traders and investors need to understand that some crypto companies might overemphasize their merged mining with Bitcoin in the future. Theyll leverage every available resource possible to suggest that they are endorsed by Bitcoin just to hype their project and pump the price of their tokens.
For instance, Dogecoin has integrated merged mining with Litecoin over the last few years. Yet, the merged mining hasnt done anything to save the Dogecoin token from falling more than 50% in the last one year whereas Litecoin has only lost 2.69% in the same period as seen in the chart above. Merged mining doesnt require any activity from the parent chain; in fact, it doesnt even require the knowledge of the parent chain.
Hence, the performance of the coin of an auxiliary chain should be analyzed in terms of its market fundamentals, technical analysis, and tokenomics because the performance of the token of the main chain doesnt have much effect on the performance of the tokens on the auxiliary chains.
Merged mining reduces the competition for miners among Blockchain projects by allowing miners to deploy the same resources to different projects. Also, it could mitigate the risk of a 51% attack in new fledging blockchains and further enhance the development of new crypto projects that are moving the world closer towards the mass-market adoption of cryptocurrencies. From a trading standpoint, the announcement of a decision to pursue merged mining could make the price of a token jump even though such a bounce may not necessarily be sustained.
Equities Contributor: Luis Aureliano
Source: Equities News
DISCLOSURE:The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.
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