Binance Report: BTC and LTC Halving Shock Could Affect Tokens Powered By Merged Mining
A new report made by the Binance exchange has affirmed that the expected “shock” from the halving of both the Bitcoin (BTC) and Litecoin (LTC) could affect the tokens which are sustained via something called “merged mining”.
The report considered Charlie Lee’s prediction that some miners would end up shutting down their mining activities after the halving, which is expected to happen in August, and it affirmed that merged mining could interfere with that.
In case you are not familiar, merged mining is to use the work done for one blockchain in other small ones using something that is named an Auxiliary Proof of Work protocol. There are some tokens which do that these days such as Dogecoin (with Litecoin) and Namecoin (with Bitcoin).
According to the report, there are some shortcomings from merged mining because the miners might not have incentives to support the so-called child blockchains while the level of operations costs go up. This could make the price of the tokens decline as they are abandoned. This could also make the dependence of the asset go up and create attack vectors for scammers.
Dogecoin, considered the most successful example of merged mining, could be at risk if this happened. At the moment, over 90% of its hash derives from Litecoin, so there is the possibility of a bleak future ahead. The network might even end up dead in case nothing is done to save it if the miners decide that it is not worth to continue it.
While tokens such as Dogecoin are still somewhat correlated to their parents such as Litecoin, the level of this correlation with the rest of the crypto market seems to be decreasing as the prices of cryptocurrencies move up.
The main problem with these tokens is that they are failing to provide the basics in order to keep the miners attracted to them and this vulnerability can end up harming them with time.
Binance’s conclusion is that blockchains which are not used do not have a lot of value. If just like Namecoin, they are only powered by people who are already mining other tokens, they will end up going down.
Also, merged mining leads to a concentration in how the crypto economy works, so it is fair to say that this technology is not very suitable to create tokens which will act in an independent way and bring real value to the users as they are very closely linked to other major tokens and will suffer from external shocks such as price halvings, for instance.