The analytical arm of Binance delves into the concept of merged mining. While merged mining was a success in the case of Dogecoin, Binance highlight several risks with this model.
- Dogecoin’s adoption of merged mining has been a success with huge amounts of hash power from Litecoin mining pools securing the protocol
- The decision to adopt merged mining for a project poses several risks including the network becoming vulnerable to attacks in the transition phase
- In the long-run, merged mining may act as a further incentive for miners to secure proof-of-work blockchains as block subsidies for such blockchains decrease through halvings
The first example of merged mining took place in 2012 when Namecoin switched from a proof-of-work (PoW) mining algorithm to the auxiliary proof-of-work (AuxPoW) algorithm which facilitates merged mining. Through this process, Bitcoin miners could now also use their hash rate to mine on the Namecoin blockchain. Binance Academy has described merged mining as the “act of mining two or more cryptocurrencies at the same time, without sacrificing overall mining performance”.
The motivation driving the merged mining model is to provide greater security to the smaller chain. In the merged mining model, miners on the “parent chain” can now also apply the equivalent hash rate to the “child chain” to mine for block rewards without compromising their performance on the original chain.
However, such a transition does not come without risks. Binance Research, the analytical arm of Binance, has detailed a report exploring the risk and rewards of merged mining with a specific focus on the case of Dogecoin-Litecoin.
Dogecoin-Litecoin Case Study
After launching the mainnet in December 2013, Dogecoin adopted merged mining in July 2014 with Litecoin acting as the parent blockchain. Upon adopting the merged mining model, the majority of major Litecoin mining pools updated their infrastructure to also support mining Dogecoin.
With the goal of merged mining being to secure the smaller chain with the hash power of the parent chain, Dogecoin has largely achieved this goal. As of July 8th 2019, the hash rate deployed on the Litecoin network is 454 TH/s while the hash rate deployed on Dogecoin is 415 TH/s.
After adopting the merged mining model in July 2014, it took until September 2014 for Litecoin pools to implement the infrastructure to additionally mine Dogecoin. In September 2014, a 1500% increase in the hash rate deployed on the Dogecoin network was observed as the Litecoin pools transitioned to additionally mining on the Dogecoin network. Since this point, the monthly changes in the hash rate between the two networks have been highly correlated with a correlation figure of 0.95.
The major Litecoin mining pools are now also the major Dogecoin pools. In both cases, the same top four pools account for over 51% of the hash rate. The research found Dogecoin mining to be even less concentrated than Litecoin mining with some solo miners choosing to only deploy their hash rate on the Dogecoin network.
Risks & Rewards of Merged Mining
Despite success in the case of Dogecoin, transitioning to merged mining is a risky proposition for a project to consider. If a project transitions to merged mining, it relies upon mining pools of the parent chain implementing the necessary infrastructure to avail of the merged mining. In the case that none were to implement the infrastructure, the network would be highly insecure. In the case that only one major pool was to transition to supporting merged mining, this pool would easily obtain over 51% of the hash rate share enabling them to execute attacks.
Merged mining may also lead to a scenario where the child blockchain becomes dependent on the parent blockchain. No cryptocurrency that has adopted merged mining to date has switched back to the original mining algorithm. Switching back would require a hard fork and would likely result in a hash rate and difficulty drop. This acts as a strong incentive to maintain the merged mining model once it is adopted. The strength of the child blockchain will, therefore, depend heavily on the strength of the parent blockchain. In a scenario where the Litecoin network becomes extremely concentrated and insecure in its mining environment, it would be extremely difficult for Dogecoin to successfully execute a hard fork to change its mining algorithm.
One idea proposed in the research is the possibility for merged mining to act as an incentive for PoW miners to secure parent blockchains in the face of decreasing block subsidies. Block subsidies currently comprise the majority of PoW miners revenue but these subsidies decrease regularly through halving events coded into the protocols.
The Litecoin block subsidy halving is scheduled to take place in early August and will result in the block subsidy reducing from 25 to 12.5 litecoin. The next Bitcoin halving is scheduled to take place next year at block height 630,000. Binance has previously researched how miners may be compensated after the upcoming Litecoin halving. Price increases and increases in the amount of fees users pay to transfer across the protocol are two major ways in which miners may be compensated for reduced block subsidies. Data has shown that to date, the fees paid on the Bitcoin network have trended up providing some evidence that this may continue and provide sufficient incentive to miners as block subsidies continue to halve.
Merged mining may be another potential avenue which miners on major PoW blockchain can be incentivised. The model allows miners on larger blockchain to tap into the rewards of smaller blockchains without sacrificing their computational power on the larger chain. The extra incentive rests with how valuable the miners believe the crypto asset operating on the smaller chain will be. There may not be a strong enough incentive in the near-term for miners to undergo the necessary technical and maintenance upgrades to tap into the extra rewards of merged mining. For example, projects such as RSK and Elastos have launched merged mining with Bitcoin but not every Bitcoin major pool has transitioned to facilitate mining these chains. In the longer-term, there may be space for technological innovations which make merged mining an easier process for miners to transition to.