There are some concepts on the cryptocurrency market that are not as well-known as the fundamental ones. One such process is merged mining. At its core, merged mining is the mining of two or more cryptocurrencies simultaneously. It also involves the use of work done for one blockchain, which is usually called the parent blockchain, on other, smaller, or child blockchains.
The first time merged mining was mentioned as a concept was in a description by Satoshi Nakamoto back in 2008. The founding father of blockchain suggested that such an approach would allow miners to work on two blockchains in parallel.
Although the technology is now gaining momentum, some projects, such as Namecoin, JAX.Network, and Dogecoin , have already successfully integrated merged mining based on their own blockchains or more secure networks with growing popularity.
How it works
If taking an illustrative example of the operational principle of merged mining, it is possible to imagine a lottery ticket that wins twice if it is selected as the winning one. Merged mining offers simultaneous rewards for both blockchains of operation and the processing power of the miner can be distributed evenly to several chains via the so-called auxiliary proof-of-work (AuxPoW). The blockchain providing the proof of work acts as the parent blockchain, while the one providing validation acts as the auxiliary. The coins generated from merged mining share their hashing algorithms and provide miners with rewards.
There are numerous ways of organizing merged mining, and profits will not necessarily be equal for the chains in question. If Bitcoin is one of the chains and the other is a lesser rewarding one, the lion’s share of the profit will be attributed to Bitcoin. Similar chains will generate similar rewards if the hashrates demonstrate significant correlation under the competitive pressure from miners. There are also cases when merged mining can be unprofitable if the bandwidth and data storage exceed profits.
There are problems with merged mining though, considering that security issues with some chains can influence their profitability. Mining power distribution and centralization issues also exist and have impacts on the difficulty of calculations, thus affecting the incentives of validators.
The problems associated with merge-mined coins include possible impacts on mining power distribution, mining power centralization issues, effects on proof-of-work difficulty and validation disincentives. However, the benefits still outweigh the cons, as merged mining prevents mining power dilution and adds security to auxiliary blockchains operating under more secure parent chains like Bitcoin.
The scalability trilemma solution
The trilemma of scalability has had its fair share of solution proposals and merged mining combined with sharding was one of them. Though viable, tests have revealed that merged mining leads to centralization by virtue of the simultaneous mining of several coins by a single miner and the collection of rewards for them. Thus, miners mining more shards get more rewards and advantages over network participants with limited resources. The interest of all miners to mine the most shards leads to centralization of mining in the hands of the network participants with the most computing power, who can afford the maintenance of the powerful data-centres with high network bandwidth. Scaling adds to more centralization and ousts weaker network participants along with decentralization from the trilemma.
But merged mining still has prospects in solving the scalability problem, as proven by the research team of the JAX.Network. The project developed a special algorithm that balances rewards among all participants in a proportional manner for their contribution to maintaining the network. As a result, the so-called PoW GPU algorithm ensures a high level of decentralization making blockchain resistant to the centralized problems of other blockchains.
As such, the merged mining technology allows for solving a security problem too, especially when it comes to a threat of a 51% attack. For instance, in 2014 Dogecoin switched to merged mining with Litecoin after miners started leaving the network due to decreasing mining rewards. Fewer miners meant that the Dogecoin blockchain might become more centralized as its hashrate was rapidly dropping.
One more invention to provide miners with more favorable conditions in the market was proposed by JAX.Network in a form of sharding approach. The technology allows miners to choose their shard subsets and download all relevant data and the Beacon Chain to form valid blocks and place them in the Merkle tree for simultaneous mining. The resulting rewards are proportional to the hashes generated during mining, thus guaranteeing that small mining farms will be able to coexist with larger miners, regardless of bandwidth and storage capacities.
Such an approach ensures the same balance as in a network with a single blockchain, as rewards and the influence on the network as a whole are proportional to the hashrates of the participants maintaining it.
Market prospects
The numerous solutions that had arisen over the years have not yet solved the Scalability Trilemma, but some have come close enough to ensure the viability of scalability without sacrificing decentralization as a whole.
Due to the ever-growing threat of 51% attacks, the transition to joint mining may well become a steady trend, which will be more demanded and reliable as the industry develops and reaches maturity levels required for broader application. New generation solutions such as JAX.Network, offering the possibility of merged mining on their own platform in a more efficient and secure way, can be particularly promising for the future of the technology.