Merged mining is the process of allowing two different crypto currencies based on the same algorithm to be mined simultaneously.
This allows low hash powered crypto currencies to increase the hashing power behind their network by bootstrapping onto more popular crypto currencies.
This is quite a complex process. All the transactions for both networks are ordered and their merkle trees hashed out. The two blockchains are classified as the parent and the auxiliary blockchain. The Auxilary blockchains merkle root is inserted into the extra nonce section of the parent blockchain – i.e. Bitcoin or Litecoin with Dogecoin and Namecoin as the auxiliary chain.
As the information of one chain’s set of hashes has been incorporated into a superfluous part of the other blockchain then a proof of work can be considered to have been achieved if a solution with a specific difficulty has been performed.
In the case of Bitcoin and Namecoin, the difficulty is lower for Namecoin as there is less network power on that chain – i.e. the number of zeroes in the hash is less. The problem with this is that if a relatively large pool in the Bitcoin network switched to merge mining it could take a very large portion of the namecoin hashing power.
There are three scenarios:
1. The merged miner finds a solution where the difficulty is too low to provide a valid hash and proof of work for either chain.
2. The merged miner finds a solution where the proof of work has been achieved for the auxiliary chain, but not for the parent chain.
3. The merged miner finds a solution for that is greater than the difficulty requirements for both the parent and the auxiliary blockchains.
In case 1 nothing happens and the merged miner inserts a new nonce value and rehashes. In case two the miner has found a solution for the Namecoin network and propagates its solution throughout that network, if mining in conjunction with Bitcoin. In case three solutions have been found for both of the chains and so a all the required information for confirmations is propagated to dedicated miners of both networks and the merged miner has won both Bitcoin and Namecoin or Dogecoin and Litecoin.