Alkimiya Protocol: Establishing a Capital Market for Block Space
As mining competition becomes more intense, there is a natural need for a capital market to provide services for computing power producers, in order to manage risks through different stages of the mining cycle.Source: Alkimiya Blog
Original Title: 《Introducing Alkimiya Protocol》
Compiled by: Biscuit, Chain Catcher
Background
The mining industry, after a decade of exponential growth, is at a crossroads.
With the industrialization of the mining sector, the entry barrier has increased. Well-funded institutions are entering the industry, intensifying global competition for mining hardware procurement. Meanwhile, as the block space economy develops, the percentage of mining costs relative to block rewards is rising. Ethereum MEV signals a new and more complex behavior that will change the game.
The return on mining is no longer a simple linear calculation.
Traditional commodity producers can enter large derivatives markets to hedge trades and mitigate risks, while miners and their investors bear most of the risks. The only way to trade spot hash power is through buying and selling machines. However, due to the difficulty of moving hardware, the machine market is extremely inefficient.
As mining competition becomes fiercer, there is a natural need for a capital market to serve hash power producers, allowing them to manage risks through different stages of the mining cycle.
For years, centralized entities aimed at creating hedging tools for miners, such as cloud mining, machine tokens, OTC hash power swaps, and FTX hash power indices, have failed to establish meaningful trading volumes.
Both the supply side and the demand side have issues.
On the supply side, miners wish to sell hash power through cloud mining platforms or hash power token issuers, but need to transport machines to specific locations, making it too costly for miners to participate as sellers.
Most cloud mining/hash power token projects ultimately choose to purchase machines themselves to protect issued contracts/tokens, suffering most of the losses when the market turns bearish, as people tend to buy these products only in bull markets.
On the demand side, no project can answer this billion-dollar question: who are the essential buyers of hash power tools?
The challenge for user growth in hash power tools is the price anchoring mechanism. The output value of machines is easily influenced by various physical attributes, while its theoretical pricing reflects multiple factors, with underlying parameters changing every second. Simply using BTC or ETH price futures/options for hedging cannot achieve delta financial neutrality.
This means that it is difficult for project parties to price the fair value of hash power. Therefore, existing hash power tools are designed too roughly and are also too complex to assess.
To create practical tools for miners, a sustainable and consensus-driven speculative market needs to be established.
Given that there are no essential buyers for hash power tools, there is no large-scale demand to attract miners to participate and sell hash power in a liquidity market.
Overview of the Alkimiya Protocol
The solution is to transform hash power into something different.
Abstractly, the rewards generated by hash power over a unit of time are merely a stream of cash flow. These cash flows can be deconstructed and restructured into other forms of cash flow assets that traders and investors are already familiar with.
The Alkimiya team is developing a protocol to facilitate this process, divided into two parts:
The first part is a permissionless non-custodial protocol that allows miners to sell their hash power through bilateral contracts.
The second part is a structured product engine, where users can restructure bilateral contracts into other forms of cash flow-backed assets (e.g., fixed income bonds, convertible bonds, perpetual contracts, DAO payments).
Unlike most yield products that are token-staked, the cash flows of these assets are protected by the underlying hash power, representing the economic value generated on-chain.
Hash Power Contracts
Miners can sell hash power in exchange for an upfront payment that locks in their hash power for a period, or they can sell call options to enhance their return rates.
In a bear market, miners can hedge downside risks by locking in early profits to cover monthly operating expenses. In a bull market, demand for spot hash power is very high, allowing miners to lock in profits at high premiums.
Miners can interact with Alkimiya through running mining pools, as Alkimiya only redirects reward addresses rather than physical hash power, allowing miners to join the market without installing software or migrating machines.
Miners can join or leave the market at any time. Any miner can easily switch between mining and selling hash power in the market.
Alkimiya achieves this by balancing the economic incentives of miners and buyers; for detailed mechanisms, please refer to the official documentation.
Hash Power Structured Products
Tokens (Silica) represent ownership of the contracts and will be burned upon default or redemption. These tokens can be split and traded on secondary markets. Any token holder can claim mining rewards upon contract expiration.
By transforming mining return rates into cash flow modules in token form, users can use them to create cash flow assets of different styles.
For example, hash power swap contracts that provide different hash power rewards over different periods can be bundled together and reissued as new products: 5% fixed income bonds + rewards from continuously reinvested on-chain DAO new contracts, with expenditures coming from a combination of mining rewards.
Alkimiya allows users to freely design and launch these "structured product engines," such as fixed income bonds backed by hash power and convertible bonds based on mining revenues. Hash power perpetual contracts separate block subsidies and MEV earnings, with structured products operated by DAO funds mining on-chain.
Anything is possible.
These assets can be traded on DEX and integrated with the broader DeFi ecosystem. The cash flow returns come from the economic activities that sustain the blockchain network, rather than from fluctuations in collateral value or borrowing interest.
It forms a closed loop and introduces a new "enhanced" tool to the DeFi world.
As user demand for hash power contract assets increases, it will also stimulate demand for the underlying hash power, which is how user growth occurs.
Future Work and Research
Decentralized Oracles: The Alkimiya oracle is a network of node alliances that extracts hash power and reward data from mining pools. We are looking for ways to improve data granularity and reduce reliance on mining pools.
BTC Native Solutions: The Alkimiya protocol is built on Ethereum as a proof of concept. Our main goal has always been to create something useful for Bitcoin miners. We are actively researching BTC native solutions that will allow us to port the system over and directly serve Bitcoin miners.
Beyond PoW: The structured product engine can deconstruct and restructure anything that generates cash flow. The underlying contracts do not necessarily have to be based on mining revenues. We are also looking for ways to integrate staking derivatives.
Related Reading: 《In-Depth Exploration of Consensus Capital Markets in the Crypto Era》
