PNG files don't display alpha in the viewport automatically. You need to apply it to the diffuse and opacity channel. In the opacity channel change the alpha source setting as Joeriv indicated. Also, make sure transparency is enabled in the viewport settings. To explain what you are seeing... All pixels in a PNG have an…
I'm not trying to get the alpha working. Just so we're on the same page. I just want to know why the red circle expands into a square at its boundaries. As I said before, I can fix this easily enough by adding a filled layer at the bottom in photoshop, but I'm not interested in the fix. For the purposes of this, I'm not…