Lowering the Drawbridge into the Courtyard

A fairly quiet week in the space with sideways movement/retracements to trend across the board. Given us plenty of time to continue levelling up our research and investment frameworks and push networking in the space that bit further.

Before we get into it, a quick shoutout to GMX Blueberry Club for hooking us up with this dope armour for our blueberries! 🏰🤝🫐

👀 What’s to Come in Volume 6

• 🔑 Key News: Base Launch, Stablecoin News, A Reverse Hack, Exploits, Continued Adoption, DeFi Updates, New Projects & more from CJ

• 🔥 Hot Narratives: Decentralised Stablecoin Strength, BSC Roadmap, Casino Retracements, OP Stack is BASEd, and FaaS Making a Comeback?

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

• 📉 HTF Price Action Scenarios: ETH Crab but LTF Bullish Until Invalidated from Vlad

• 🏰 Castle Positioning & Risk: A Number of Strategies Shared

• 💰 Trade Wins: FLOW Dominates

• ⛓ On-Chain Sleuthing: Unidex Gathering Large Interest and Smart Money Moves from Cl & AmirOrnu

• 🔬 Is Base Coinbase’s Golden Opportunity?: Analysis of Coinbase’s Move from Herres

🔑 Key News

Probably one of the more interesting weeks in 2023 as Coinbase announces their L2 “BASE” built on top of the OP Stack.

Some controversy in the stablecoin market as the BUSD issue continues, interestingly MakerDAO adds MKR as collateral for DAI which sparks controversy while Frax Finance is going 100% collateralized.

Also, another interesting debate on CT with mixed opinions as Jump & Oasis reverse exploited the Wormhole hacker.

Some of the negative news

Galois Capital closes down due to funds still stuck on FTX, Paxos ends relationship w/ Binance, NBA Topshot deemed a security, Binance closed positions of Australia users without warning, Coinbase suspends BUSD trading.

Exploits that happened this week

Revert Finance users were exploited, Hope Finance rugs for $2M, Kujira and Buffer Finance BLP exploited, Rollbit (Solana-based gambling platform) also got exploited, MyAlgo wallet warns users to remove funds, suspected to be leaked private keys.

Adoption is not stopping!

Deutsche Bank x Memento partnership, Aramco x droppGroup entering Web3, Microsoft enters the node infra service space, China backing HKs proposal to become a crypto hub, Tencent Cloud supporting web3, Google Cloud becomes validator for Tezos, Blackrock starts Metaverse fund, Audius integrates Tiktok, Spotify testing NFT gating system, announcement of Japan’s “Metaverse Economic Zone” called Ryukugoku.

Weekly DeFi Updates

Klaytn upgrades their tokenomics, Sturdy introduces LSDs to their strategies, Yearn Finance entering the LSD wars, LayerZero introduces testnet bridge and GoETH market, Synthetix v3 Live on mainnet, Sperax launches bribes, BackedFi tokenizes and launches synthetic $COIN (Coinbase), GMD launches their launchpad, Blur founder doxxed himself.

Some interesting projects to look out for

• Renegade Fi: On-chain dark pool backed by Dragonfly, announced their raise of $3.4M in seed recently.

• Turnstile Fi: Lending protocol on Canto which applied for their hackathon S5.

• Velocimeter: First solidly fork on Canto, devs from CRE8R DAO (live)

• Equilibre: First solidly fork on Kava EVM (live, emissions start this week)

• Conduit: Infra platform to launch an OP-stack rollup

• FluxSwap: New dex on Conflux

• esGMX Market: OTC exchange for esGMX

• YFX: fBomb x Farming-as-a-service type of project

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

🔥 Hot Narratives

Decentralised Stablecoin Strength

The decentralised stablecoin space continues to see lots of interest. The highlight this week was the LQTY listing on Binance. In other news, Volta Finance had their final unlock from presale and has shown a lot of strength, still trading above a 4x from the sale.

BSC Announces Roadmap

Binance Smart Chain is upping its game, recently announcing a 2023 roadmap featuring a sidechain, a zk rollup, and an optimistic rollup among other chains. This is a great sign from the chain with the highest daily transactions. As usual, my main horse here is Thena, which has now achieved the 5th spot on BSC in terms of TVL. Check out this article on the sleeping chain.

Casino Retracements Continue

Casino or GambleFi continues to face retracements across the board, with most finding decent support. Rollbit’s case has been further dented by tweets surrounding their legitimacy. As I went into last week, I can see a cooldown in GambleFi continuing with some sideways accumulation until some new innovation is seen at the contract level.

OP Stack is BASEd

With the announcement of Coinbase launching their own L2, Base, on top of Optimism’s OP Stack, we have seen several optimism tokens receive a pump as speculators pile in. Especially seeing this across my Chinese Twitter timeline. Don’t miss our analysis piece on the move from Coinbase down below!

FaaS Making a Comeback?

With the launch of Yieldfarming Index this week (the first from GMD’s new launchpad), eyes are back on farming-as-a-service (FaaS). One protocol we believe is doing interesting things in this space is Leverage Inu, a memecoin turned real-yield farming project. The team recently decided to pivot away from earning yield through GLP to flexing their Uni V3 LP skills. They have a liquidity unlock on the 4th of March, so please DYOR. Interesting to see this particular meme hampered by too much liquidity. They are proposing to reduce their liquidity:MCap ratio and boost the treasury for those sweet farming gains. One to watch…

📈 Macro Outlook

Past Week Events

• 02-22 19:00 UTC : FOMC Minutes

  • Nothing-burger

• 02-23 13:30 UTC : GDP 2022Q4

• 02-24 PCE : Headline 5.4% (est. 5%) and Core 4.7%(est. 4.3%)

  • Shifted bonds yields higher

• 02-27 Durable Goods : MoM durable goods -4.5%(est. -4.0% prev. 5.1%) and core durable goods 0.7%(est. 0.1% prev. -0.4%)

Upcoming Events

• 03/1 15:00 ISM Manufacturing PMI(Feb) : Fore. 48 Prev. 47.4

• 03/1 TSLA Investor day & Master plan release

• 03/2 13:30 Initial Jobless Claims : Fore. 197k Prev. 192k

• 03/2 21:00 Fed Waller Speaks

• 03/3 13:30 ISM Non-Manu. PMI(Feb) : Fore. 54.5 Prev. 55.2

• 03/3 16:45 FOMC member Bostic speaks

• 03/3 20:00 FOMC member Bowman speaks

• 3/8 13:15 ADP Nonfarm Employment Change(Feb) : Fore. 10.25m Prev. 11m

• 3/10 02:30 BoJ Interest Rate Decision

• 3/10 13:30 Nonfarm payrolls & Unemployment Rate

• 3/14 12:30 CPI

• 03/22 FOMC : 0.25% vs 0.5% that is the question (probability : 76% vs 24%)

BTC and Macro

Major trends were the rising bond yields over the past 2-3 weeks due to the anticipation of sticky inflation. Gold reacted the fastest, and then SPX and Bitcoin lagged in response to the change in macro. Going forward we have a relatively quiet week ahead of us before inflation-related data points such as the PMI, jobless claims and CPI in the following weeks. Options markets are also pricing in this gap in events with a contango structure (lower IV in the near term).

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

📉 HTF Price Action Scenarios

Hello frens!

Gonna keep this one short and sweet as nothing much has really happened. Last week I wanted to either see a conclusive break to the upside to indicate to me that the uptrend will continue OR some weakness in the current push.

We got the weakness scenario and price is now here.

We broke the LTF trend to the downside and tapped the 4h demand zone that is holding up this entire push. On an even lower timeframe we have a reversal forming from the 4h demand which is a very bullish sign.

I am therefore bullish for as long as the 4h demand holds. The 1h could still come lower to grab more liquidity before reversing, but there are already good enough arguments for me to look for longs.

Once the 4h demand breaks I will be sidelined again. Ultimately after this much sideways action, I’ll wait for a new definitive break of the 1462 level before looking for shorts.

Some alts have retraced quite nicely so I’ll be looking to scoop some up with sound risk management. Will cut my losses short if my bullish thesis doesn’t manifest. A few weeks ago most arbitrum alts were forming new local highs and the risk:reward wasn’t there for me. It is however a different story now.

Bullish until invalidated!

See ya next week

Courtesy of 0x_Vlad - trend-based trader and MentFX student

🏰 Castle Capital Positioning and Risk

As always, the members within The Castle have varying risk levels. Some scaled out over the past few weeks majorly, some are TPing often and buying trend retests, and others are heavily positioned for the future bull. Check out a couple of nice threads from frens below on portfolio strategy and where your profits should go.

💰 Member Trade Wins

Quiet week all in all with one outstanding play

CJ Farms FLOW on Canto for >10x

⛓ On-Chain Sleuthing

Unidex Gathering Interest

The Perp aggregator $Unidx seems to interest a couple of crypto institutions and high-net-worth individuals in the space. Not long ago we heard about Andrew Kang looking at buying OTC from the team and now we are seeing some interesting on-chain activity regarding the project. People like Roger Lin (wallet), the head of NGC ventures have been buying some sizeable amount of UNIDX. Additionally, a number of 8-figure wallets (that we think could be linked to some cryptos institutions) have also been seen accumulating UNIDX.

Smart Money Moves

• Most of them reduced some exposure and cut some bags in the first days of the week, but recently started riding the LSD narrative, by buying small cap LSDs like $SGT and $RVST

• the late players to Shibarium narrative who missed the $PAW's pump, entered $MPG instead of that and pumped it too, some rotations toward $Hoichi happened to which is a shibarium related project.

• so many smart money addresses loaded $PDT this week, which was because of $PRIME airdrop for $PDT stakers

Research and analysis from Cl & AmirOrnu

🔬Is Base Coinbase’s Golden Opportunity?

Thoughts on Coinbase expanding to L2

This week I will be giving my thoughts regarding an article made a couple of days ago by a new member of Castle Capital, Francesco. As stated in his article, Coinbase is expanding on-chain to their own L2 environment using the tech stack of Optimism. I will talk about how this development will progress and how other actors may be inclined to go the same route and why now could be a viable time. In particular, I would like to highlight the centralisation aspects and what implications their different options will have in building on-chain value accrual for their brand.

Centralisation - a Positive or Negative?

Many L2 solutions currently have centralised components as can be seen by the Risk analysis on L2beat. This is attributed to smart contract upgradeability or centralised operators such as sequencers, which order transactions on the L2. We all know that centralisation gives power to a few actors, which for this nascent ecosystem of L2s is a correct decision, as billions are at stake. However, this might be an opportune moment for centralised players such as Coinbase to deploy their own on-chain environment, as the barrier between decentralisation and centralisation of the rollup ecosystem is still in its infancy. They still maintain power over design choices and when to decentralise their operators and smart contracts overtime. In addition, it is easier for them to tap into the composability of a L2 ecosystem than setting up their own L1 chain.

The next point that brings me to centralisation is that it is a permissioned ecosystem. All users need to perform a KYC/AML check. This will be novel regarding the adoption of L2 ecosystems. To my knowledge, there are no big permissioned L2 ecosystems out there where this criteria currently needs to be met. Although this might cause some friction, the user base of coinbase counts 110M users and has AUM of $80B. Besides, this might just give them the perfect base (kek) to tap into the regulatory uncertainty and political risk by having an on-chain environment but with all KYC’d participants. You don’t think that the SEC will love that? All in all this will strengthen the position of Coinbase as a core player in the web3 sector.

What options does Coinbase have to accrue value?

L2 revenue is based on the traction of the L2 itself. Fee collection of transactions (adoption of the L2) - costs of posting/validating the proofs on L1 are (basically) the profit model for L2s. This means that if they can tap into their user base from their exchange and move them onto BASE to use web3 dApps, they can profit from that adoption. This is something they cannot do within the old Coinbase environment.

Apart from L2 profit, Coinbase can tap into some monopolistic arbitrage. With having both an on-chain orderbook and off-chain CEX orderbook, while also maintaining the privilege of ordering transactions in the on-chain environment as a sequencer, arbitrage can be captured between both books. MEV is basically captured here for the operator with knowledge of both these environments. I don’t think Coinbase will do this, however, although they might look into combining both order books to deepen liquidity in one environment for their users. Furthermore, once they decentralise their sequencer, this is unlikely to happen as consensus has to be reached on ordering/finality between multiple sequencers.

Concluding thoughts

Although this could be a good opportunity for other players to deploy their own L2 ecosystem, the window is closing. Other rollups that aim for more decentralisation within their stack will become more performant over time. When users have the choice between a permissionless and permissioned ecosystem, it will be interesting to see what comes out on top. What is even more important is the choice of buildooors. We did see a trend of anon founders that wanted to opt for security-like tokenomics to accrue and grow value and thus decided to be anon to not be on the Fed list. Hence, a permissioned system could hinder innovative models and new designs due to being KYC’d. Other factors that could decide adoption rate are yields in and friction of entering each permissioned vs permissionless ecosystem. I do think neutral credibility is the most important characteristic for the longevity of a technology and protocol to be adopted globally over time. Maybe this L2 of Coinbase can actually become somewhat credibly neutral in the future.

🧵 Castle Content

kwizzles Creates a BTC x Fear & Green Index

Hansolar Takes a Look at Gamma Charts

Francesco Sprays out the Content on Rysk Finance, Fold x Sushi, and Solana

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