As many of you already know, my team and I have been working very hard to build PixelAlpha for the past year or so. All that effort will come to a head over the next few weeks as we launch our token sale. The purpose of this piece is to explain why PixelAlpha is important to the crypto ecosystem, and what it can mean for you as a contributor to the sale.

As a quick note, I will be using the term “cryptoasset” extensively here. This refers to not only cryptocurrencies, which are the most mature subclass, but to all blockchain-based assets.

Why Derivatives?

The market size for cryptoasset derivatives is provably gigantic. It is potentially worth north of $200b daily, today. We arrived at this number by dividing $1.4 quadrillion USD (that’s 15 zeroes!) of the global traditional derivatives market volume, which includes equity futures, options, credit swaps, interest swaps, and more, by the value of all stocks traded globally, and multiplying that by the cryptocurrency market cap. Of this Total Addressable Market (TAM), only approximately 3% is accounted for. While some platforms offer derivatives and traditional players like Goldman have entered the space, but they largely trade only Bitcoin futures at a total volume of around $5,000,000,000.

Daily notional trade volumes across the largest derivatives exchanges

Derivatives are such popular and powerful tools in the traditional finance world because they allow investors to make money through declines in stock prices. This makes them indispensable in all risk management strategies. The cryptocurrency world doesn’t have many tools to mitigate risk, so PixelAlpha fills a huge need in a market that often follows Bitcoin’s swings point for point:

source: coinmarketcap.com

The cryptoasset market is in a period of exponential growth. Derivatives are the key to maintaining this expansion because more sophisticated risk management will attract more sophisticated investors, who in turn inject more capital. So PixelAlpha is both a catalyst and a beneficiary of an ecosystem where institutional investors can thrive.

Why Decentralized?

Derivatives are proven in traditional markets as drivers for underlying asset growth and as a highly popular product class in themselves. But thanks to blockchain technology, we can take it a step further and use decentralization to make derivatives completely trustless, secure, and simple to create.

A trustless system is one that no single actor can exploit to gain an advantage. PixelAlpha is trustless because smart contracts handle the heavy lifting for code execution and account tracking. This is a huge upgrade from derivatives in centralized markets, which all require a counterparty clearinghouse to serve as insurance in case one side defaults and is unable to pay. We relegate this task to code, which can execute much more efficiently and quickly to prevent a default scenario. Replacing the human arbiter with code has the additional bonus of lowering trading fees to nearly zero, as no central party needs to take a percentage as premium.

Revolutionary Security

The security benefits of decentralization have been well documented. If everyone owns their wallets and is in custody of their assets, there is no single pool of assets for malicious actors to pull off large heists as have been seen with Mt Gox, Bitfinex, and other centralized entities. So, while exchange-wide catastrophe can be avoided, the issue remains that private keys are the only line of defense for individual accounts. This has inspired us to build an AI-enabled security protocol called Intelligent Data as a Service (iDaaS) to protect against cases where private keys are compromised. It works by crafting smart usage profiles around users so that any suspicious activity, from unfamiliar location to different device to unfamiliar network will be flagged for multifactor authentication.

We hope to see this become the industry standard, as today’s cryptography does not protect against the numerous methods attackers have of acquiring private keys.

Finally, decentralization allows anyone (or group of people) to offer derivatives on any asset. As more organizations opt for tokenizing their assets (like HSBC did with soybeans), there will be an increase in debts, bonds, interest rates, and countless more tracked via blockchain. This seismic shift is another major factor in why decentralization fundamentally makes more sense.

Already, the sheer volume of cryptoassets is staggering. On coinmarketcap alone, there are over 1,600 cryptocurrencies with active trading volume. The vast majority of these have been added after 2016. For reference, the NYSE has 2,800 listed stocks, and it has been around for 200 years. Instead of trying to control which of these cryptoassets people trade on PixelAlpha, we are opting instead to make the derivative framework that shifts responsibility to the users to make a market for their product. This means institutions have the ability to offer existing products like CDOs, index funds, and more to the entire market as a baked-in feature.

What is a Pixel (PXA)?

PXA is our token which will be the primary settlement mechanism on the platform. The number of Pixels equivalent to the settlement value will be generated by smart contract and transferred to the payee’s account, while the collected pair currency from the payor will be used to purchase an equivalent number of Pixels at market value and burn them, thus keeping the total number of Pixels in circulation the same. This will ensure that Pixels themselves always have a liquid market and that a steady value increase is built in (read more about the benefits of holding PXA).

Therefore as volume increases on PixelAlpha’s exchange, the price of Pixels will increase proportionately as the buy/burn mechanism leads to greater open-market demand (fig A). Additionally, this structure makes PXA a uniquely solid investment during bear periods as its price is intrinsically tied to market volatility rather than directionality (fig B). This also increases the opportunity cost of “hoarding”, as if the price of PXA becomes too high users will see it as a risk and usage will decrease, which decreases volume, which decreases value (fig C,D).

In the event that the value of all settlement fees outpaces the value of all Pixels in circulation, settlements will be done partially in PXA, partially in pair currencies.

Figure A

Figure B

Figure C

Figure D

I hope you all are as excited as I am to share this journey. Visit our site to sign up for our mailing list, and join us on Telegram and Twitter to stay updated on status.