Analysis & Opinions

Merged Mining on Bitcoin: Expanding Bitcoin’s Capabilities [with RSK Sidechain]

What is merged mining on Bitcoin? 

Simply put, merged mining is a mechanism that allows different cryptocurrencies that use the same algorithm, to be mined together. When analyzing the study on the profitability of bitcoin merged mined blockchains, we found the following information: 

Merged mining on Bitcoin is the act of using work done on a blockchain on one or more, Auxiliary blockchains and accepting it as valid on its own chain, using Auxiliary Proof-of-Work (AuxPoW). AuxPoW is the relationship between two blockchains for one to trust the other’s work as their own. It is important to mention that the parent blockchain does not need to be aware of the AuxPoW logic, as blocks submitted to it are still valid blocks.” 

The three biggest advantages of merged mining are: 

1 – Miners won’t be required to invest on extra hardware. Hence, they can further monetize their current hashing power with no additional costs. 

2 – Cryptocurrencies with a lower hashrate can gain additional hashing power by piggybacking off a cryptocurrency with higher hashrate.

3 – Miners earn extra rewards by maintaining the secondary chain.

So how can miners actually make money from merged mining?

As described on RSK´s merged mining section, there are different sidechains that offer miners the possibility to merge mine and increase the profitability of their hashing power. The chart below shows the monthly rewards, per sidechain, that miners earn by doing merged mining: 

* Statistics correspond to September 2019.

** Coin prices used in calculations are from the 27th Sep 2019.

As we can see on the chart above, RSK is currently the most profitable bitcoin merged-mined platform. Each proposal has its own payment method. In the particular case of RSK,  fees are paid by a Smart Contract called REMASC (Reward Manager Smart Contract)

The Reward Manager Smart Contract (REMASC) is a pre-compiled smart-contract that is executed on every block and has the responsibility to fairly distribute rewards collected from transaction fees into several participants of the network. However, the distribution of rewards of a block is only performed once the block reaches a certain maturity. In other words, the rewards are paid only after a fixed number of blocks have confirmed a block. With the exception of the first blocks in the blockchain after genesis, every time a block is added to the blockchain another previous block reaches maturity and its rewards are paid.

How can mining pools start merged mining with RSK?

Mining pools just need to follow the following steps:

1 – Setup an RSK Node

In order to setup a node on RSK, mining pools need to download the node and specify their config file as well as configuring their node to have mining capabilities

2 – Adapt mining pool software to merged mining

Mining pools simply need to follow five steps in the Merged Mining Implementation Guide or use the existing merged mining plugins options.

Which additional benefits does merged mining provide to the ecosystem?

Sidechains that enable smart contracts execution, expand Bitcoin’s capabilities with complex use-cases like off chain transactions, decentralized finance (DeFi), stable assets, digital identity (reputation), loyalty programs, traceability, social impact and many more. Additionally, different domain-specific blockchains can be connected by bridges providing interoperability to Bitcoin’s network. 

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This article is intended to be used and must be used for informational purposes only. It is important to do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice.

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