Merged mining, or Auxiliary Proof-of-Work for the more technical crowd, is the process ofmining two separate cryptocurrencies at the same time. Although not as popular as traditional Proof-of-Work or even Proof-of-Stake consensus algorithms, some projects have implemented merged mining to piggyback off more secure networks as they grow.

Although he didnt include it in the Bitcoin whitepaper, Satoshi Nakamotooutlined a rough ideaof merged mining in a Bitcointalk forum in 2009. Lets look further into how this innovative mining works, what it means for the projects that implement it, and how you can take advantage as an investor.

Satoshi outlining an early form of merged mining

How does Merged Mining work?

Every merged mining implementation has anauxiliary chainand a more establishedparent chain. To work together, both chains must share the same hashing algorithm. Were going to examine one of the most popular merged mining pairs,Namecoinand Bitcoin, to explain the process.

In this pair, Bitcoin is the parent chain while Namecoin is the auxiliary chain piggybacking off Bitcoins network. Both cryptocurrencies use the SHA-256 hashing algorithm for mining.

Implementation

Parent chain developers dont need to perform any additional work to implement merged mining. Therefore, the Bitcoin network doesnt even need to know that Namecoin is mining along with it.

Auxiliary chains, however, need some added development to integrate merged mining. Continuing our example, Namecoin developers updated the blockchain to accept proof of Bitcoin mining as valid on the Namecoin blockchain as well.

Merged Mining Process

Merged mining requires no additional computing power for the miners. As a miner, you mine Namecoin and Bitcoin just as efficiently as you would when mining only Bitcoin. You (or your mining pool) just need to perform the additional set-up to support it.

Heres how it works:

You begin by assembling a block of transactions for each chain BitcoinandNamecoinin our example. The Namecoin (auxiliary chain) block includes what youd expect in a standard set of transactions. The Bitcoin block also contains regular transactions. However, it has an additional transaction with the hash pointing to the Namecoin block you just constructed.

After assembling your blocks, you mine. There are a few different scenarios that could play out here:

You mine a block at Bitcoins difficulty level.You finish creating the Bitcoin block and broadcast it to the Bitcoin network. Because the difficulty level at which you mined the Bitcoin block is higher than Namecoins difficulty level, you also mine a Namecoin block. You receive both mining rewards.You mine a block at Namecoins difficulty level.You finish assembling the Namecoin block by inserting the header and hash of the Bitcoin block. The Namecoin chain then accepts this block. Its able to recognize the additional Bitcoin header and hash as your proof of work because of the development work you did to support merged mining. You only receive the Namecoin mining reward.You mine a block between Namecoins and Bitcoins difficulty level.You experience the same outcome as scenario number two.Merged Mining ImplicationsThe Good

Small and new blockchain projects have a few good reasons to integrate merged mining. Most importantly, doing so beefs up the security of their network while still being able to operate as a distinct chain. These auxiliary chains also gain exposure by being associated with a more popular blockchain.

Additionally, miners are heavily incentivized to participate as they receive extra income at no additional cost or power. And, because miners usually trade between the two coins to keep what they favor, theres a boost in liquidity for both cryptos.

The Neutral

Parent chains fall victim to some blockchain bloat with the addition of auxiliary chains. The hashes that the auxiliary chain adds to the parent chains transaction tree are small, but theydo take up space.As long as coins like Bitcoin are successful in implementing second-layer scaling solutions, this bloat shouldnt become an issue.

The Bad

Unfortunately, its not all sunshine and rainbows. Integrating merged mining requires additional development work on the auxiliary chain. When switching over from another mining protocol to merged mining, you need to hard fork. Another hard fork is necessary if you ever want to switch away from merged mining.

Miners and mining pools also have some work to do if they want to reap the benefits of mining two chains. Although merged mining doesnt require additional power, it does require more maintenance work. In mining two blockchains, you have twice the connections to serve and twice the distribution channels to maintain (if you run a mining pool). Some groups may not find the added upkeep worth the extra coin.

Investor Insights

Overall, merged mining provides more of an advantage to miners than it does to investors. However, when combined with other information, merged mining could be a telling sign of a promising project. Here are some past and future examples:

Namecoin No Long-term Guarantees

Namecoin, effectively a decentralized domain registry, was the first coin to have merged mining with Bitcoin. Once a top 10 cryptocurrency by market cap, its dropped significantly to a spot in the high 200s. It serves as a great example of how a project can slowly fall by the wayside even when tied to cryptocurrencys most powerful network.

Previously the number three coin by market cap, Namecoin is no longer in top cryptocurrency discussions

Even though a significant number of mining pools support Namecoin merged mining, the coin hasnt seen much adoption in its five-year history. Development is also not as active as similar projects. This fall from grace goes to show that just because a cryptocurrency includes merged mining that doesnt necessarily mean the fundamentals warrant an investment.

Dogecoin Immediate After Effects

Early in Dogecoins life, the community decided to integratemerged mining with Litecoin. They found that with the original mining mechanism in place, the network would run out of significant mining rewards within the year. With no changes, miners wouldnt have an incentive to mine, and the network would be susceptible to a 51% attack.

Almost immediately after switching from Proof-of-Work to Auxiliary Proof-of-Work, the Dogecoin price rose from about $0.0002 (~0.00000041 BTC) to around $0.00047 (~0.00000115 BTC). Thats over a 180 percent increase in BTC price over just a couple of weeks.

Dogecoin experienced a significant price increase after implementing merged mining with Litecoin

Although just one data point, it shows that a project that switches to merged miningcouldbea profitable short-term investment. There are a few reasons why this may be true.

First, the additional network security brings immediate confidence to the community. Also, tethering to a more well-known coin provides more exposure to lesser-known cryptocurrencies. Its like a quick marketing boost. Finally, merged mining adds liquidity to both chains as miners trade to keep the coins they prefer.

Elastos Potential Sleeper Pick

Elastosis a blockchain-powered Internet that integrates merged mining with Bitcoin. With this coin still relatively unknown, it may be a solid pick up at this time. Once the platform is complete and merged mining is available, the Elastos price could see a similar rise to Dogecoin.

Additionally, Elastos is collaborating withNEOandBitmainas theG3 of China. Its rumored that Bitmain will dedicate a portion of the companys hash power to mining Elastos. For those of you that dont know, Bitmain controls some of the largest Bitcoin mining pools. So this support is a positive indicator for the Elastos price.

With this in mind, it seems as if the Elastos price should have firm upward pressure once mining begins. However, analyzing the project as a long-term (greater than one year) hold requires a deeper dive into the fundamentals.

Final Thoughts

Merged mining is an excellent option for young projects looking to grow without fear of a 51% attack. From an investment standpoint, a projects decision to implement merged mining could cause an immediate jump in price. Although, this price boost may not last.

No matter how it affects the price, merged mining is something to be aware of as an investor, a miner, or even just a crypto enthusiast. With the ever-increasing threat of 51% attacks, switching to merged mining could very well be a trend that we start to see more of as we grow as an industry.