Setting Photoshop for Pixel Art

To setup Photoshop for pixel art first you need to preserve sharp pixels without dithering when using Smart Objects and doing transformations. This also allows you to use the Puppet Warp tool with sharp pixels.

1) For resizing Smart Objects and Puppet Warp:

Go to Edit / Preferences / General / Image Interpolation and set it to Nearest Neighbor (preserve hard edges) / click OK. 

2) For the Transform tool (press CTRL + T) make sure the Interpolation mode is set to Nearest Neighbor.

Next you need a pixel brush and eraser:

Using a square brush/eraser helps keeping them square while resizing them, otherwise they will get rounded as you make them bigger.

3) Choose the Pencil tool and open the Brush Preset picker. 

Click on the Settings icon  and on the bottom click on Legacy Brushes / click OK

Still in the Brush Preset picker find and expand Legacy Brushes. 

Find and expand Square Brushes and choose the "Hard Square 1 pixel" brush. 

Make sure the opacity is 100%

4) Select the Eraser tool and make sure the mode is set to Pencil, just like in step 3 select the Square Brushes, choose "Hard Square 1 pixel" and set the opacity to 100%

And there you go, Photoshop should be ready for Pixel Art.

I'll post down here the default values if you want to revert all the changes.

A) Go to Edit / Preferences / General / Image Interpolation and set it to Bicubic Automatic / click OK.

B) For the Transform tool (press CTRL + T) make sure the Interpolation mode is set to Bicubic Automatic.

C) For the Pencil brush you can simply select a brush like the hard round one

D) For the Eraser set the mode to Brush and select the hard round one

And that should bring Photoshop back to its default behavior.