A Castle Under Siege

The Castle Chronicle: Volume 8

Author

Atomist
March 16, 2023 • Est. Reading Time: 25 minutes

Some seriously volatile times this past week. I’m sure you had a peaceful weekend touching grass with no stress 💀 

Just when we thought markets might be forming a low timeframe bottom, the USDC depeg debacle meant we were charting stables more than our favourite alts.

Events such as these can be extremely nerve-racking. However proper portfolio management can help to mitigate drawdowns and even depegs. The question once again rises around the place of USD stablecoins in the ecosystem — isn’t this what Satoshi was trying to break free of in the first place?

Nevertheless, stablecoins have become a core pillar of DeFi and this situation only emphasises the need for thought-leaders in the space to ponder this long and hard. Unfortunately, we have not yet built a system that is unaffected by traditional banking.

Looking on the bright side, however, I see these events as extremely bullish for the space moving forward as more and more market participants demand decentralisation — whether in the form of their stablecoins, exchanges to trade on, or self-custodying their funds.

 👀 What’s to Come in Volume 8

🔑 Key News: USDC Depeg, Euler Hack, CZ Buying, Exploits, Continued Adoption, DeFi Updates, New Projects & more from CJ

🔥 Hot Narratives: Decentralised Stablecoins, Binance Buying $1b, BTC Comeback? and AI & ChatGPT

💹 Macro Outlook: Simplified Round-up and Implications from Hansolar

📈 HTF Price Action Scenarios: ETH Bearish Until Supply Zone Broken from Vlad

🏰 Castle Positioning & Risk: My thoughts on portfolio management

💰 Trade Wins: Bottom Calling, Depeg Bidding, LQTY/FLX Rides and more

⛓ On-Chain Sleuthing: Digits DAO, LDO Movements, USDC Depeg Plays, Midgetwhale and Smart Money Moves from Cl & Amir Ormu

🔬 Scaling Ethereum - TLDR’ing Rollups from Herres

What is your favourite section of the Chronicle?

Login or Subscribe to participate in polls.

🔑 Key News

Well, this week has certainly been a massive rollercoaster of emotions, fear and panic, with headlines such as USDC and various other stablecoins depegging to Euler’s massive $190M hack. USDC hit 0.87 before promptly recovering to 0.995 at the time of writing after Circle CEO announced that the deficit was solved and they were fully liquid.

Big banks like Signature got shut down while Fed announced an emergency lending facility to save depositors and creditors of SVB. Interestingly, HSBC UK decided to acquire SVB UK for 1 GBP.

Not all hope is lost though, as Daddy CZ posted that his $1B recovery fund will be converted into BTC, ETH and BNB amidst a strong rally even when US bank stocks did horribly during Monday’s open.

Some of the negative news

India imposes AML laws on crypto sector, SEC rejects VanEck BTC ETF again, Kucoin getting sued

Exploits that happened this week

  • Euler got flashloaned due to a donatetoreserves function which was not audited and cost the protocol $190M

  • Tender Finance got exploited by a whitehat who returned the funds shortly

  • Hedera’s mainnet got exploited via precompiles

  • Mosquitos Finance on Aptos rugged

  • PeopleDAO treasury exploited via google sheets for 76ETH

  • $2M into $0.5, a user got MEVed and Kyber updates the situation

Adoption is not stopping!

Weekly DeFi Updates

NFTs

Some interesting projects to look out for

  • Maverick Protocol: Uniswap competitor, live already

  • Chronos: Arbitrum Solidly fork with similar mechanics to Thena on BSC

  • Taichi Network: High-Speed Transaction and Block Delivery Network

  • Sail Exchange: Orderbook Dex built on Fuel Network

  • Good Entry Labs: Arbitrum derivatives platform, apparently tied to some big names

  • Proven Tools: Raised $15.8M to utilize ZK Proof of Solvency

  • Mauve: First compliant and registered DEX which raised $15M

  • MapleStory Universe: GameFi which might be related to the real Maple Story

Courtesy of CJ - check out his telegram channel for daily news, projects updates and new releases

🔥 Hot Narratives

Decentralised Stablecoins

Back on our list this week after the recent USDC event. As mentioned previously we believe decentralised stablecoins will play a much bigger part in the ecosystem moving forward — this could well push into overdrive now, however. The ones we are watching are LQTY (LUSD), FLX (RAI), OATH (Ethos Reserve), VOLTA (VOLT), and VSTA (VST).

Binance Buying $1b of BNB, BTC, ETH

Once again our saviour CZ has graced us with $1b worth of bids to the market. This will be heavily weighted to BNB. Moves like this only solidify my bullishness on the BSC DeFi sector which is seeing lots of growth. Our favourite picks Thena and Level held up and have since reacted extremely well in the drawdown. To further solidify this thesis, we witness Uniswap announce a launch on BSC, highlighting the bull case for the chain.

BTC Comeback?

BTC had already been in the spotlight with Ordinal NFTs and BTC DeFi making waves, however, for me, it is the destabilisation of our trust in central stablecoins that could really bring BTC back. Once again we are asking the question if BTC really can be money. Definitely worth thinking about BTC allocation in your portfolio.

AI & ChatGPT

To be honest, I find this narrative pretty pushy (Crypto + AI) and most of it so far is hot air with no crypto requirement. However, with the launch of ChatGPT 4 coming, it could be a profitable short-term trade.

💹 Macro Outlook

Past Week Events

  • 3/10 02:30 BoJ Interest Rate Decision 👉 Actual -0.1% Prev. -0.1%

  • 3/10 13:30 US Jobs Report - Nonfarm payrolls & Unemployment Rate 👉 Actual 3.6% Fore. 3.4% Prev. 3.4%

  • 3/12 12:30 FED saves SVB deposits and creates a credit line for distressed banks 👉 BTC rallies 14% as markets see an end of QT 👉 Bonds fall at the most rapid pace from 2008 while SPX stays in a range 👉 Fed funds rate probabilities start to price in no hikes at 50%

  • 3/14 12:30 CPI 👉 Actual 5.5% F 5.% P 5.6% 👉 BTC and crypto rally on the data

Upcoming Events

  • 3/22 FOMC : 0.0% vs 0.25% (implied probability : 50% vs 50%)

  • 3/31 PCE Inflation

BTC, ETH and Macro

BTC store of value

Where only a week ago, 50bps hikes were back on the menu and the #bigflip was making headlines, the atmosphere has completely changed since the bank runs on Silicon Valley Bank. Fear of contagion to the wider economy and the USDC depeg initially sent Crypto tumbling down into 20k support, but once the FED stepped in a new regime was instigated. The market interpreted the FED’s actions as dovish in terms of liquidity leading to the strongest reactions in BTC and GOLD.

The probabilities of the interest rates for March also repriced dramatically from 70% chance of a 50bps hike to a 50% chance of no hike today(23-03-14). The market will likely want to see poor economic data so it can get to lower rates faster. The FED is now in a precarious situation fighting on both fronts; inflation and stability of financial markets. It will have to tread extra carefully not to break anything…

Called for Long Vol last week 👉 Volatility has arrived

Volatility has returned. ETH DVOL hit the 1st bottom percentile of last week and has bounced hard the following week chasing BTC’s spot driven 14% rally starting with FED’s unlimited backstop policy.

Short tenors were where most of the action was at. BTC 7-day rolling IVs have hit +100 when BTC’s historical 7-day IV usually ranges from the high 40s to 50s. An IV of 100 can also be interpreted as the market expecting BTC to fluctuate between +5.23% and -5.23% per day.

Longer tenors are still sceptical of the move and have not moved much. ETH’s DVOL is currently in the 14th percentile which is still quite low.

Shorting volatility on the shorter-term tenors while IVs are elevated could be decent r/r plays. Calendar spreads can also be a safer way to extract some premium from the markets if you believe the IVs will come down over the next few weeks. eg) Short BTC-17MAR23-24500-C & Long BTC-31MAR23-24500-C

Courtesy of Hansolar - check out his telegram chat for all things options, crypto and DeFi

📈 HTF Price Action Scenarios

Hello, frens!

Last week I wanted to see some new LTF bullish trends form from this 4h demand zone.

That didn’t quite happen though and instead, we saw the 4h demand not holding and on top of that we got a significant break of structure to the downside.

That already got me fairly bearish as a pullback trader. I marked up the daily supply from which the bulk of the sells dropped on the market.

And this is the current LTF push into that daily supply zone. The 1h is very bullish here and could see continuation. However, I am more so looking for a bearish reversal of this LTF trend and then hopping onto shorts. I am THIS close to shorting, just need to see some weakness in the current push and all my confluences will be met.

That being said, all this back and forth made me want to take another look at the HTFs and shuffle them around a bit to formulate a bullish plan too. And every bullish scenario starts with invalidating the bearish scenario.

For this purpose, I will use the 2D chart as it paints a nice picture in terms of what’s holding price down. Should we see a bullish break of this level I will probably go full bull mode as price had a long enough time to accumulate (lots of back and forth, flat MAs).

But for now, I’m still bearish!

I’m very excited to see what will happen this week. See y’all next time!

Courtesy of Vlad - trend-based trader and MentFX student

🏰 Castle Capital Positioning and Risk

This a great time to talk positioning, risk and overall portfolio management. In the face of depegging stablecoins, most portfolios suffer and an investor’s ability to execute trades diminishes (e.g. holding USDC but not being able to buy crypto due to depeg).

As trust is lost in stablecoins, we can look back to a time before them, when crypto portfolios were made up of BTC, ETH and alts. In fact, many crypto OGs probably still use this same playbook. Having a portfolio constructed of BTC, ETH and alts (heavily in BTC, ETH - barbell strategy) allows you to weather drawdowns seen in an alt-heavy portfolio. When black swan events do occur, those low alt entries will still be at great discounts even when buying with BTC. Definitely something to consider when planning your strategy.

Finally, to reduce risk to your well-being and lifestyle (especially if full-time in the space), this may be a good time to think about securing funds into fiat banks to ensure you can continue living for a length of time no matter what happens on-chain or with off-ramps.

NFA

💰 Member Trade Wins

defipleb and DefiMann Call Bottom

Hansolar’s LQTY Plays

Jimmy Killing it with FLX

CJ and Others Playing the Depeg/Volatility

⛓ On-Chain Sleuthing

Digits DAO LOADING on Honeycomb

The DAO minted 237 Honeycomb NFT. They seem very bullish on the BERA token that will be airdropped following this collection. Transaction here.

Institutions and Whales Exiting LDO Position

We have seen Terraform Labs, which participated in LDO seed in 2020, selling its entire LDO bag from the seed — 2M LDO for $4.2M. Seed address and sale address.

Arthur Hayes has also been selling his LDO bag — he sent his $1.9-2m LDO bag to Binance on the 13th of March

Michael Egorov (Curve founder) Arb’ed tf out of USDC Depeg

Check out his wallet here.

Our Favourite Salty GNS Whale Swings GMX on the Dip

Midgetwhale briefly joined the GMX family, only to sell his bag on the recovery pump. Even the enemy knows GMX too fkn stronk.

Smart Money Movements

  • Smart money addresses converted their USDC to USDT before the USDC depeg and Castle was warned about it

  • LUSD and BUSD were the other two popular stablecoins for convertors

  • Smart Money addresses detected in Y2K and LQTY - likely due to the USDCs depeg

  • After the USDC depeg smart money addresses were buying cautiously — big players like DCF and GCR made good profit buying USDC

How DCF made more than $500k in a Day

DCF longed USDC and DAI with ~3x leverage on-chain using two DeFi Protocols (UwU and Aave)

He started with $5.5m and got an average leverage of 3x by looping his collateral in UwU and Aave, so his position size was $16.5m and he made 575k on it which is 10.5% ROI on his starting collateral.

Research and analysis by Cl & Amir Ormu

🔬 Scaling Ethereum: TLDR’ing rollups

On the 10th of March, Scaling Ethereum by ETHGlobal began. During this event, talks are given and people are educated by buildoooors within the space. In the next weeks, I will highlight a talk every week that was given during this event. The reason why these type of events where people prepare ‘TED talks’ is of huge value for researchers like me, is that they make top-notch infographics and visuals. This can make it easier to grasp complex systems and architectural designs between the different technologies that are utilised. This means you will also gain more knowledge and understanding by watching the videos. The three topics discussed in the next weeks all touch on a separate focus area of research to scale Ethereum and dApps

The three topics and videos I will highlight and discuss in the following weeks are the following:

How Rollups actually work

Kelvin makes a very good point which sharpened my understanding of how smart contracts and rollups should be seen from a design perspective. A rollup is nothing more than:

  1. A dataset of inputs (which are from L1) —>

  2. Run in the execution environment, which generates —>

  3. An output (which is on L2)

This means that the rollup is defined by the ordering of data on the L1, it has an automatic connection with a ‘’parent system’’. Nothing here is checked with proofs as we don’t need proofs when going from L1 —> L2 as the rollup is defined by it. We only need proofs for data that is not coming from the ‘’parent’’ system, for example from rollup 1 to rollup 2 or from L2 to L1, as both their outputs are not defined by the other chain its input. This characteristic of a ‘’parent system’’ makes everything derived from the input trustless.

The top-notch infographics I was talking about.

Most people think you have this smart contract, which is the bridge, on the L1 that holds this gun. The gun here is a validity proof or fault proof which checks the security of the rollup. This is not correct. The bridge itself has nothing to do with the rollup, the rollup does not know there is a bridge. You can think of the bridge as a view into the rollup.

This is a very important point, as this will make you understand what we are actually proving on the L1 later on. In addition, this means that if the bridge is exploited, the rollup will operate fully functional as it should. The problem that arises is that the rollup will start to become undercollateralised, but it will still run the inputs into the correct outputs!

Hello, where are the proofs ser?

So where do proofs come into the picture here? Kelvin explains that there are 4 separate classifications of arguments that can be produced to convince smart contracts on an L1 or rollup that specific data is valid, aka accepting the state of a certain execution environment which in itself is not defined by the inputs of that rollup it tries to accept data from. Here he explains how bridges simplistically work and how they can be convinced.

The 4 different types he highlights are:

  1. Authority-based — 1 or multiple entities (threshold/multi-sig) saying this is the state of rollup or blockchain A, trust me brev

  2. Light clients — ugly brother of the chain coming in, saying good enough as a representation with pretty good trust assumptions

  3. Fault proofs — two persons going back and forth saying ‘I am right’ until they find something malicious or not

  4. Validity proofs — maths nerd with good maths arguments you can’t refute and have to believe

So what is the worst thing that could happen? Apps on our chain or rollup could be convinced of something invalid, which in turn can break stuff. However, this does not directly impact the other chain! The other chain (i.e. Ethereum) is running independently and has no clue that the rollup is reading data from Ethereum. For example, if the smart contract of a rollup on L1 releases funds then this is bad, but it does not directly impact the L2. Most of the time, a rollup does not even know a bridge exists, it just works based on inputs and outputs!

“We only have rollups”

Kelvin also makes the point here that we only have rollups and that there is no need to make distinctions between optimistic and zk rollups. His reasoning is proving and verifying the execution that happened on the L2 to the L1 (or a different rollup) is an implementation detail of a contract that is on a completely different system! This implementation detail is just used to establish a viewpoint into the chain that wants to settle its data. The execution of the rollup on itself has nothing to do with this.

A good analogy between how implementation details of validity proofs and fault proofs are built around rollups nowadays is that ZK proof systems are trying to cram the EVM inside of it, while optimistic proof systems built a proof system around the EVM.

“Really it is just rollups and we want to make a proof system around it”

Kelvin Fichter

Thanks for reading and make sure to watch those vids! I will see you guys next week, where I will highlight the implementation effects of EIP-4844 on rollups!

Courtesy of Herres

🧵 Castle Content

CJ on Filecoin VM

Francesco on Bubblemaps

CJ on Protocols Affected by Euler Hack

Thanks for reading, please give us a follow at Castle Capital and subscribe to The Castle Chronicle for an update each week!

Virtually yours,

Atomist & The Castle

Reply

or to participate.