Implications of Merged Mining

In case you haven't come across it already, merged mining (also summarized here) is a way of simultaneously mining multiple blockchains. If all miners support merged mining, then the global hashrate of any of the alternative blockchains becomes the same as the global hashrate of bitcoin. There is always an incentive for a miner to merge because he will start collecting coins from alternative blockchains at no extra cost.

It is to be tried first with NameCoin, with the intended goal of securing it by reusing the hashing power of bitcoin. I think that given the upside with no downside, it will be only a matter of time before all miners support merged-mining.

So what are the long-term implications of merged-mining?

For one thing, it massively reduces the barrier-to-entry for a new blockchain. Prior to merged mining, a new blockchain was vulnerable to attack because there was insufficient mining power available to secure it from attack. There was no real incentive to mine it because not only did the coins have low or no value, but the low global hashrate meant that the whole chain was vulnerable. A 'chicken and egg' type scenario, or 'network effect' if you like.

But now (or at least shortly), alternative blockchains will, almost from inception, be as secure as the main blockchain. Here's a first draft at how to start up your own chain:

1. Think about how much money you're going to plough into it. Lets say it's $1 million.
2. Start your own blockchain with exactly the same characteristics as bitcoin but with a far lower level for maxcoins. How low is dependent on how much startup capital you decided above.
3. Mine it for a while on your own to build up a hefty warchest W of newcoins.
4. Declare publicly that newcoins will be exchangeable 1 for 1 with bitcoins. On your favourite exchange, put in $1M worth of bid at 0.95 and W worth of offer at 1.05. Keep it there.
5. Advertise your new blockchain for merged-mining with bitcoin mining pools. This shouldn't be hard, as it's free profit for them.
6. Advertise your new blockchain with merchants. Since merchants already use bitcoin there's little or no setup cost in allowing them to accept newcoins, especially with the fixed exchange rate you have imposed.
7. Advertise your new blockchain with the public. It helps if you are Justin Bieber, or Facebook, or a sovereign nation.
8. For as long as you can, maintain the 1:1 price ratio between bitcoins and newcoins. Eventually newcoins will gain acceptance as being as valid as bitcoins, since they are after all feature-identical and interchangeable with bitcoins, at which point you gradually sell off your warchest.

So what are you waiting for!?