Merged mining (also known as Auxiliary Proof-of-Work) is the process of mining two different cryptocurrencies at the same time.
Cryptocurrencies that participate in merged mining must share the same hashing algorithm. Popular algorithms include SHA-256 (Bitcoin), Scrypt (Litecoin), and Equihash (Zcash). This connection enables miners to build blocks on both chains using the same hashing calculation to secure them.
Additionally, every merged mining scenario has a parent chain and an auxiliary chain. The parent chain contains the actual mining and doesn’t need to know about the auxiliary chain or the auxiliary chain’s mining. The auxiliary chain is the blockchain that’s “piggybacking” off the parent chain. Unlike the parent chain, this chain needs additional development work so it can register that the mining from the parent chain is valid.
For example, you’re the miner and the two chains you’re mining are ParentChain and AuxiliaryChain.
Before mining, you assemble a set of transactions for each chain. The AuxiliaryChain set includes the associated transactions on the chain. The ParentChain set, however, contains the standard transactions on the chain plus a transaction containing the hash of the AuxiliaryChain block you just created.
ParentChain and AuxiliaryChain use the same hashing function. And AuxiliaryChain developers have built the network to allow for merged mining. These two components enable you to solve the hashing functions on both chains simultaneously without exerting more computing power.
When mining both chains, two main scenarios could arise:
- You solve the hash at ParentChain’s difficulty level.
- You solve the hash at AuxiliaryChain’s difficulty level.
Ideally, the difficulty level of ParentChain will always be higher than AuxiliaryChain’s difficulty level.
- Scenario 1: You finish creating the ParentChain block and send it to the ParentChain network. Because you solved the ParentChain hash at a difficulty that’s greater than AuxiliaryChain, you also mine an AuxiliaryChain block, receiving both rewards.
- Scenario 2: You finish creating the AuxiliaryChain block, inserting the block header and hash of the ParentChain block. The AuxiliaryChain accepts this block because it includes proof that you completed the work after the AuxiliaryChain block header and transactions. The proof being the ParentChain hash and header. You receive the AuxiliaryChain miner reward.
The Pros of merged mining
- Merged mining requires no additional computing power. Because miners are solving for both hashing functions simultaneously, their computing power remains the same. They’re just submitting their proof of work to two different recipients.
- Auxiliary chains receive increased hashing power. Smaller blockchain projects can use merged mining to tap into the hashing power of a larger parent chain. Ideally, miners would have no issue in switching to merged mining because they receive increased rewards for the same amount of work. Therefore, this type of mining could be a reliable way for emerging blockchains to protect themselves against 51% attacks as they scale.
- The parent chain is unaffected. The parent chain needs no additional work to participate in merged mining. And the only additions to its blockchain are the auxiliary chain hashes that are added to its transaction tree.
The Cons of merged mining
- Merged mining is complex to set-up. Although merged mining has its benefits, many teams don’t believe that the additional network security is worth the time it takes to implement.
- It requires additional work for miners. To participate in merged mining, you need to administrate the new blockchains. This extra work can be especially time-consuming for pool operators who have a lot more moving parts than just a single miner.