Overview

Alkimiya integrates DeFi into the blockchain space to provide financial risk hedging tools for miners. Facilitating the pre-release of hashrate income by matching miners with buyers enables miners to lock in costs and future revenues while buyers can profit from surplus mining. Unlike other token staking yield products, the cash flow of Alkimiya’s contract products is guaranteed by the underlying hashrate. The product is in Beta testing phase, with the BTC market available on the official website. As of now, the protocol has not issued a token.

Understanding Alkimiya in One Article

Introduction

Every transaction on Ethereum requires a Gas Fee, consuming Gas for computation and storage. The more complex the transaction or the higher the storage demand, the greater the Gas Fee required. However, to ensure blocks are appropriately sized for smooth communication among light nodes and to maintain stable block production times, each block has its Gas Limit, presenting Ethereum with significant scalability challenges.

Examining the transaction process in detail, when a user initiates a transaction, there are two operations: a transfer transaction and a smart contract call. A transfer transaction has a fixed cost of 21,000 Gas, whereas the cost for a smart contract call depends on the size and computation of the function parameters (Calldata). On average, each byte of block space consumed requires 16 Gas. Layer 2 solutions primarily consume resources for storing Calldata, as they package transactions and upload them to Ethereum’s mainnet for settlement.

Post EIP-1559, Gas Fees are divided into a Base Fee and a Priority Fee. The Base Fee adjusts automatically based on block space usage, while the Priority Fee incentivizes full nodes to include transactions in their blocks. A block’s limited Gas capacity means limited transaction capacity. To get their transaction included, users may increase their Priority Fee, competing for block space by offering higher fees to miners.

This competition introduces the concept of block space, an abstract notion referring to the space on the blockchain where code execution and data storage occur, with Celestia being a well-known project in this area. Users who want to purchase a token quickly pay higher Priority Fees to expedite inclusion in the block space. As block space utilization grows, the Base Fee increases according to predefined rules, resulting in significantly higher Gas Fees. Block space is tied to time, and time represents arbitrage opportunities. Combining block space, Gas Fees, and time can lead to financialization.

Alkimiya leverages the concept of block space by creating block space options products, smoothing cost and revenue curves for miners. This article delves into the operational logic of Alkimiya’s block space products and analyzes their current development status.

Overview of Alkimiya

Alkimiya’s parent company is Anicca Research, founded by Leo Zhang, a Stanford University mathematics graduate. After graduation, Zhang worked in equity derivatives at Morgan Stanley and founded Anicca Research in 2021. Alkimiya integrates DeFi into the blockchain space, enabling miners to pre-release their hashrate income by matching them with buyers. This allows miners to lock in costs and future revenue while buyers profit by covering the purchase cost through excess mining returns.

In June 2021, Alkimiya completed a funding round led by Dragonfly. In November of the following year, the company raised an additional $7.2 million in a funding round led by 1kx and Castle Island Ventures, with participation from Dragonfly, Circle Ventures, Coinbase Ventures, and others. This funding was primarily used to expand the team.

In October 2023, Alkimiya launched a Beta version of its contract matching market for BTC and ETH block space on the mainnet, though it was not open to the public. Currently, the protocol has a BTC test open market but has not issued a token.

Product Basics

The block space market, like any market, can be divided into supply and demand sides. The suppliers are miners, responsible for block production and maintenance, while the demand side includes entities like Flashbots, DApps, and transaction users.

For suppliers, costs are relatively fixed, but revenues are uncertain. Profitability is difficult to predict due to code upgrades and varying market activity levels. For the demand side, block space operates similarly to a real estate economic model. Since all blockchain activities ultimately settle in block space, users paying Gas fees are uncertain about when their transactions will be processed and how much they will ultimately cost, reflecting block space’s time value.

Alkimiya aims to create a hedging market to lock in costs and revenues in advance, mitigating the uncertainties of on-chain transaction volatility. Currently in its Beta testing phase, the product consists of two main components: Silica and Hash Vault. Silica is a float-to-fixed swap issued by block space producers, while Hash Vault packages Silica contracts and restructures the underlying cash flows into various financial products.

Hedging Tool: Silica

As block space producers, miners experience significant revenue fluctuations. Alkimiya aims to build a hashrate swap market through its tool, Silica. In this market, buyers agree to prepay for contracts based on future mining revenue generated from a specified amount of hashrate during the contract period. This setup allows miners to lock in profits and stabilize costs and revenue in advance. Buyers, on the other hand, benefit from potential excess mining returns in the future. Since Silica is non-custodial, sellers do not receive payment immediately.

Miners create their own Silica contracts, agreeing to deliver future hashrate revenue over a specified period. An off-chain oracle provides real-time hashrate indices, giving buyers access to uncertain future revenue streams. This oracle relies on Ethereum for stability. If there is an issue with the oracle, the information from the oracle will trigger calculations, updating the state of Silica and initiating settlement. A settlement bot calls the Silica account daily to check the status of active contracts.

Source: aniccaresearch.tech

The market operates through a P2P+P2Pool model, allowing miners to issue their hashrate contracts to sell hashrate and time. Users do not need to purchase an entire contract; they can specify the total amount of USDC they wish to spend or the amount of staked ETH they want to buy, meaning a single miner’s contract can have multiple buyers.

At the end of the contract, the hashrate is successfully generated, and the corresponding rewards are delivered to the smart contract. The smart contract has a redemption function to distribute funds. Miners call the redemption function from the address used to deploy the contract, receiving all the tokens paid. After rewards are exchanged, the tokens are burned.

Source: bazaar.alkimiya.io

Structured Product: Hash Vault

Hash Vault is essentially a portfolio of Silica contracts. It allows users to bundle multiple bilateral contracts and restructure the payment logic into various forms of yield-bearing assets, such as fixed-income bonds, convertible bonds, perpetual contracts, and DAO payments.

Source: mirror.xyz/alkimiya-protocol.eth

Unlike most yield products that rely on a basket of staked tokens, Hash Vault’s cash flow is backed by the underlying hashrate, representing the cumulative economic activity on the blockchain. Buyers of Hash Vault deposit payments to receive Vault Tokens. These Vault Tokens represent ownership of a proportional share of the rewards in the pool upon maturity.

Current Development Status

The block space sector is relatively niche, with few competing products. There is no fully developed on-chain block space hashrate derivatives market, positioning Alkimiya as an early pioneer with its innovative product. Currently, Alkimiya’s products are in Beta testing. While there is a theoretical market demand, the actual attraction of users and capital remains to be seen.

Conclusion

By introducing DeFi concepts into the block space sector, Alkimiya has constructed a hashrate derivatives market, providing miners with financial risk hedging tools to lock in costs and revenues in advance. Inspired by the idea of hedging miner revenue curves, Alkimiya’s product design is innovative, yet the niche market with few competitors means its practical success is still uncertain.