The Scrypt Alliance

[Note: This was originally published on September 30, 2014 at Melotic.com]

Over the past couple years, several people have discussed one particular challenge that all hash-based proof-of-work coins face: block reward halving. In particular, the crescendo of commentary on this issue grew over the past 6 months because of the behavior observed on the Dogecoin network.

In a nutshell, each POW chain has limited trust funds by which it pays (subsidizes) miners to provide a unit of labor (hashing) which in turn protects the network from Sybil attacks. Each chain pays this subsidy – which is called a block reward – over different time schedules. Some chains, like Bitcoin and Litecoin empty the majority of their trust funds over the course of a decade (~81.25% is paid out in the first 10 years).

As a consequence, some observers such as Ray Dillinger (who will be discussed more in a later post) noted that unless the market value of a coin doubles in value by the time a next block reward halving occurs, then – ceteris paribus – half the labor force may leave because they are effectively taking a pay cut.

With Dogecoin this process is accelerated because its entire money supply (trust fund) is paid out to the labor force in the first year of existence. I originally wrote about this issue about 4 months ago (and further explored it in several chapters including 3 and 15); at the time of this writing 93.45% of its money supply has been awarded to the labor force.

As a result, over the past 9 months Dogecoin’s labor force has periodically left – roughly every two months which correlates with the block reward halving. Consequently, its hash rate – the chain’s primary defense mechanism – has decreased in tandem with the exodus of miners. This in turn leads to a vulnerability as it becomes increasingly less expensive to perform a 51%-type of attack on the network.

Are there solutions to this?

On September 11, 2014, the Dogecoin development team “flipped-on” merged mining (AuxPOW). This enabled Dogecoin to be mined alongside other scrypt-based coins such as Litecoin and potentially dozens of others. While it had been in the Dogecoin code for over a month, on that summer day, Litecoin mining farms and pools turned on support for this AuxPOW functionality.

litecoin-dogecoin-hashrateAnd as shown in the chart above, the result so far has been in line with expectations: the hash rate of Dogecoin has seen a tremendous boost – in the order of two magnitudes.

Consequently Jackson Palmer has dubbed this organizational phenomenon – for the conglomerate of coins merged with Litecoin – the “scrypt alliance.”

And while this has proven to be fairly successful this may not be sustainable in the long-run because Litecoin’s incentive structure is still contingent on block rewards.

Or as Jackson Palmer has noted, “Litecoin has essentially become the profitability layer that drives the security of Dogecoin’s network” – and other scrypt-based coins piggy backing on top of it.

Thus if the value of litecoin falls or fails to double in value, then theoretically the overall hashrate could decline once again and/or when the LTC block reward halves in Q3 of 2015.

The next post will discuss another proposed solution.

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