Dust Settles Beyond the Walls

The Castle Chronicle: Volume 10

Author

Atomist
March 29, 2023 • Est. Reading Time: 22 minutes

A slightly quieter week as the dust settled from FOMC and the ARB airdrop. FUD continues to circulate in the economy, banking sector, and crypto as a whole but BTC and ETH are still holding up incredibly well — it’s almost as if we’re back 👀 

Let’s get armoured up ⚔️ 

 👀 What’s to Come in Volume 10

🔑 Key News: zk Launches, Dough Kwon, Other Headlines, Exploits, Continued Adoption, DeFi Updates, New Projects & more from CJ

🔥 Hot Narratives: The Perpetual Narrative, LSD Overdose, Zero-Knowledge of what to do On-Chain, and Everyone’s a Concentrated Liquidity Expert

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

📉 HTF Price Action Scenarios: Bullish until Invalidated from Vlad

⛓ On-Chain Sleuthing: Amber Group loading ARB but also Rugged, A New GMX Power User, and USDT FUD feature along with Smart Money Moves from Cl & Amir Ormu

🔬 Why ZK Rollups are Hard from Herres

 🪂 Airdrop Rotation Speculation from Francesco

🔑 Key News

The main stories for this edition were zkSync Era and Polygon zkEVM mainnet going live while Do Kwon was finally arrested in Montenegro. Some good news for Celsius customers as they are reportedly getting back 72.5% of their crypto. Saylor also bought more BTC and repaid Silvergate loans at a discount — chad move.

Some of the negative news

Exploits that happened this week

Adoption is not stopping!

  • Bitwise launches BTC ETF

  • Omnia partners w/ Google

  • Polygon partners with Nexon Korea to power MapleStoryUniverse

  • UAE bank launches CBDC

  • XAPO bank becomes first licensed bank to enable USDC withdrawals/deposits

  • Telegram users can send USDT via chats

  • Nasdaq launching crypto custody

  • 1200 German banks will offer BTC trading

  • Fujitsu files trademark to offer crypto services

  • Alibaba Cloud announces research lab in Shibuya

Weekly DeFi Updates

Some interesting projects to look out for

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

🔥 Hot Narratives

The Perpetual Narrative

We all understand that in crypto, volatility cannot be avoided. And the sector that captures this best is always perpetual futures (perps). This is where degens and gamblers will go to spend their capital on cranked-up leverage in the hopes of making it into the big leagues. Add to this the fact that CEXs are constantly being bombarded with FUD these days and you have one of the most solid bets in all of DeFi staring right in front of you.

One may be perplexed from the outside seeing these tokens continue to outperform the market, but the simple fact of the matter is they generate insane revenue. #RealYield is not a fad that will come and go, it is what forms the basis of a solid investment thesis.

LSD Overdose

With Shanghai recently confirmed for the 12th of April, it looks as if Liquid Staking Derivatives (LSD) will be firmly back at the centre of attention again. Leading on from high revenue perps quite well, LSD protocols are also generating massive revenue. The main thing to consider here is there will likely be a lot of volatility around this event. ETH, LSD tokens and likely the entire market will probably go through some ups, and downs, scam wicks, liquidations etc. Make sure your positioning is such that this is fine by you.

Zero-Knowledge of what to do On-Chain

After the ARB airdrop, everyone is looking for their next stimmy cheque. It just so happens two zkEVMs have rolled out their carpets. Unfortunately, due to the lack of deployed projects, many are bridging over to find there is little to do. Additionally, the gas fees are quite offputting at ~$2-3. Definitely, one to keep an eye on and bridge to/from now and again, but real functionality on these chains is likely 6-12 months out.

Everyone’s a Concentrated Liquidity Expert

With the Uniswap V3 license available for forking freely in just a few days, several DEXs are gearing up to integrate the tech into their platforms with the hope of attracting deeper liquidity. But does Uniswap have something up its sleeve?

Showing that you don’t even need to fork Uni V3 is Trader Joe. Their Liquidity Book model has been one of the highest APRs for the majority of ARB pairs over the last week.

ARB airdrop has been a great educator of concentrated liquidity IMO, with many market participants dipping their toes in the tech. If done correctly, it can allow you to enter/exit entire positions in set ranges with no slippage as well as collect huge fees from sideways price action in tight ranges when volume is high.

💹 Macro Outlook

Past Week Events

  • 3/22 18:00 UTC FOMC: Raised 0.25bps to 5%
    👉 Dot plots unchanged for 2023, but increased from 4.1% to 4.3 for 2023.
    👉 Risk on assets including SPX and BTC pulled back as they expected a freeze
    👉 2Y bonds disagreeing with the dot plot, staying stubbornly significantly lower than the dot plot’s 5.1%
    👉 Gold also rallied near ATHs signalling fear in the market

  • 3/23 FED’s Balance sheet breakdown

    • Discount Window decreased from 152b to 110b: loans up to 90 days for US banks

    • BTFP increased from 11.9b to 53.6b: loans up to 1 year for US banks

    • FX Swap lines: Liquidity for friendly foreign banks(was weekly now daily)

    • FIMA Repo Facility increased to $60b: Liquidity but anonymous(perhaps not US friends)
      👉 Joseph Wang, former Fed trader mentions keeping an eye on the FIMA Repo facility which had its first sizable loan. Could be Switzerland, but could be another country 👀

  • 3/24 DB, Germany’s largest bank fall 12% after CDS(default insurance) prices hit 4 year highs

  • 3/24 CRE(corporate real-estate) sector fears escalating (closely tied to the banking sector)

    https://twitter.com/FabiusMercurius/status/1639658480532594691?s=20

  • 3/27 Microstrategy bought 150m worth of Bitcoin

  • 3/27 Silicon Valley Bank bought out by First Citizen’s bank
    👉 Costs the FDIC $20b, but relieves some fear in the markets

  • 3/28 CFTC goes after Binance with multiple allegations
    👉 Some of the allegations look like there was either a whistle-blower or they had access to his phone. Either way, the case looks quite formidable.

Upcoming Events

  • 3/28 14:00 CB Consumer Confidence

  • 3/30 14:00 GDP(Q4): Fore 2.7% Prev 3.2%

  • 3/31 12:30 PCE Inflation: Fore 0.4% Prev 0.6%

  • 3/31 OPEX

BTC, ETH, and Macro

  • Not much change on all major assets over the past week considering the amount of drama that occurred. BTC rejected off of 28.6k, but still in the range highs. ETH/BTC pair starting to look interesting; ETH looks like it wants to break out of the consolidation. Perhaps there is some narrative rotation occurring in the majors.

  • Gold, SPX, and DXY all not showing much movement. US02Y sustains its sizable gap below the current and target interest rates for 2023 indicating the bond market believes that there will be interest rate cuts this year.

  • The PCE and OPEX this Friday can bring some heavy volatility.

Option Markets

IV levels have shifted from backwardation towards a more flat structure this week.

  • Backwardation means IV(option prices) were higher in the near term

  • Flat term structure means dealers view volatility as generally similar in the near term and long term.

As for the BTC volatility premium that was seen throughout last week, it seems to be subsiding now. This is also a sign that there may be a rotation from BTC to ETH.

An additional orderbook analysis from a Korean Telegram channel GALA shows how since the 26th when large resting ETH/BTC bids got taken, the ETH/BTC ratio has consolidated.

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

📈 HTF Price Action Scenarios

Gm frens!

This edition is going to be a rather quick one because nothing has changed since last week.

Last week I wanted to see price bounce from this demand zone to break into new highs. We took a little nosedive under the demand zone but quickly reverted back. I decided to take a look at a slightly higher timeframe to maybe check for a better S/D and found this nice-looking 12h.

The demand zone got tapped and I am therefore eligible to look for longs. The conditions have been met. I will be looking to get positioned long on any LTF setup that will present itself. Invalidation of this bullish idea is a break and close below the 1613 level.

For now, it’s buy the dip time. I have positioned in several altcoins on the Arbitrum ecosystem. Bullish until invalidated!

See y’all next week!

Courtesy of Vlad - trend-based trader and MentFX student

⛓ On-Chain Sleuthing

Amber Group loading on $ARB

The group has been buying close to $8.5m of $ARB on CEX. They now hold this position on-chain and it is worth a bit more than $10m. Investment wallet.

Amber group rugged by Kokomo Finance

The group seems to have fallen for a UI hack on this lending/borrowing protocol. We still don't know exactly what happened, but the group lost close to $4m worth of WBTC in this rug. Farming wallet.

A New Power User at GMX

This address has been nailing many large trades, mostly on the short side. Trading wallet.

USDT FUD

Have been seeing some FUD about USDT on the timeline, but on-chain data doesn't confirm this FUD. The USDT reserves in Curve's 3pool is still lower than USDC and DAI, so it's in a good shape.

Smart Money Moves - Tokens

  • Smart Money de-risked quite a big part of their crypto holdings. They started de-risking pre-FOMC (Binance's spot trading halt sped up the de-risking!)

  • Smart Money detected in $BRR Protocol — they minted BRR Nodes too and still are farming with their NFTs

  • Smart Money detected in $GAMMA, likely because of UNI v3 fork szn and the new offerings of $ARB LP strategies

  • A small number of Smart Money addresses started buying $EUL as Euler received most of the stolen funds from the exploiter

Research and analysis by Cl & Amir Ormu

🔬 Why ZK rollups are hard

Introduction

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 last week’s chronicle, I highlighted a talk by Protolambda about the implications of rollups on the next EIP-4844 upgrade. This week I will highlight the talk of Haichen Shen from Scroll where he explains the basics of zk rollups and why they are needed for the future.

Scroll is building the zkEVM

Shen starts the talk with the importance of why zk rollups are needed for scaling Ethereum and compares them with optimistic rollups. To explain, a diagram of a zk rollup is shown where the data of the rollup is posted together with the proof (π) on the L1. Whereas an optimistic rollup and its fraud proof cannot have fast finality due to its 7-day challenge window, a zk rollup’s validity proof can be posted approximately every 5 minutes and thus have fast finalization. When a block is finalized this means that this block cannot be altered in any way, unless 2/3th of the total stake is slashed.

Visual representation of how a zk Rollup (L2) posts their Data in batches with a Proof (π) which can be verified on the L1 quickly for fast finality.

Aaaah, I am Prooooooving

For zk Rollups you need to build a prover that generates a validity proof of all the transactions that happened on the L2 or dApp. Because validity proofs and fraud proofs are two totally different schemes for proving, the architecture for a zk rollup is also different. The prover runs the transaction logic through special Arithmetic Circuits, which are very hard to build. This means the prover is an important part of architecture as shown in the picture below:

Visual representation of how a prover is used in proving transactions on a zk rollup (L2)

Provers that prove different types of transactions (from different dApps) do not have composability out of the box. For example, one proves DEX transactions, while the other proves transactions on money markets. These can have two totally different proving systems which might not be composable with each other. This is where a zkEVM comes in. A zkEVM has one big general prover system which can handle more general functions for proving, but what if I told you that they do this quite neatly?

By implementing the whole EVM into a proving system, all arbitrary functions that can be handled within the EVM can also be proved by this zkEVM proving system! And voila, the zkEVM is born. This also means that current developer tools such as Foundry or Hardhat can still be used for all dApps that are developed for the zk rollup on L2.

Things that make zkEVM hard

The EVM isn’t exactly developer friendly for making validity proofs.

This mainly has to do with the cryptographic scheme (ECDSA) that the EVM uses. However, solutions like polynomial commitments, custom gates (circuits), lookup, and recursive proofs all help in making the whole architecture more efficient and less clunky. In addition, state-of-the-art GPU prover algorithms with FPGA and ASIC hardware are already being developed to pave the way toward hyperscaling. There are other solutions (Starknet) that do not try to cram the EVM inside a proving system, but transpile Solidity (EVM) into their own efficient proving circuit language (CAIRO) such that you can have more flexibility within your proving system. Both have trade-offs!

The decentralisation of rollups and their architecture is still in its infancy. But the 3 pieces that need it most (imo) are: Provers, sequencers, and their smart contract.

Currently, there is not a lot of decentralisation when it comes to sequencers. The controlling entity has the right to order transactions in the L2 environment. This is to maintain the stability of the network and will take some time to decentralise. Most rollup builders have plans to decentralise later down the line and don’t want to come into the scope of the SEC. Decentralising sequencers means there will be a way for sequencers to be picked in a decentralised manner —hmmm, what tokenomic value could that bring?

Provers are easier to decentralise it seems. Scroll already implemented a decentralised proving network for their rollup. Others still need to follow. Regarding the upgradability of smart contracts, I think Vitalik said it best. Would you rather have an agreed upon 30-day time-lock for high robustness and expectation OR a governance-based approach? Not a governance-based VETO that can lift the timelock, since that just adds complexity. I think with the decentralisation ethos in the highest regard, the 30-day time lock is best as that can manage expectations over the long run the best, which is needed for a good Lindy effect.

Research by Herres

🪂 Airdrop Rotation Speculation

What happens now after the ARB Airdrop?

The first zkevm chains are here! This week zksync and polygon zkEVM launched.

Here are a few interesting points for reflection:

  1. Zksync has launched Era, its mainnet — at the moment there is not much to do there;

  2. I expect zkevm to become a fundamental aspect of future Ethereum infrastructure: activity will pick up once zksync will have more projects;

  3. Not much can be said about Polygon zkevm, which only launched a couple of days ago - but Polygon is a powerhouse so this will be an interesting one to watch.

  4. After the ARB airdrop, opinions were divided. Most people anticipated that after the airdrop people would move on to other chains (e.g. zksync). This is contradicted by on-chain analytics, which actually shows Arbitrum TVL to be almost at pre-bear market ATH.

  5. At the same time, most projects on ARB went down in price, with money from the airdrop not really trickling down to other protocols.

  6. Only the deepest of degens have bridged to farm airdrops on zksync, and opinions in different communities are already deluded by the lack of value projects and are already bridging back to Arbitrum.

  7. Airdrop season is eating up: Users are already farming other airdrops, shown by the increased activities on speculated airdrops such as Lens and Starknet

Research by Francesco

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.