Peeking through The Castle's Keyhole

Welcome to The Castle, or at least a peek of it

It is with great pleasure I am able to share with you an insight into Castle Capital, a private community of budding researchers, analysts, builders, investors and traders from across crypto and DeFi.

This weekly newsletter aims to distil key information shared within the community and how we individually act on it to profit in our trades and investments. Whether this is news, narratives, research or opinions - all of it stems from proven DeFi natives, ultimately shaping each of our decision-making processes and investment theses.

Of course, none of this would be possible without the community itself, so firstly, hats off to them. I'm lucky enough to have had the research and analysis of these chads at my fingertips, allowing me to hone my strategies and sharpen my trade execution - now I'm excited to be able to pass these on to you through The Castle Chronicle.

Within the newsletter, I'll aim to indulge you with the key news, narratives and project updates from the week, along with a high-level macro perspective, some bite-sized research-based education pieces, and much more...

👀 What’s to Come in Volume 1

• 🔑 Key News: Notable Partnerships, Adoption from Nations, zk Innovations, Project Updates, & more from CJ

• 🔥 Hot Narratives: Online Casino, BSC DeFi, LSD, & AI All Making Waves

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

• 📉 HTF Price Action Scenarios: 3 Ways ETH Price Action Could Play Out from Vlad

• 🏰 Castle Positioning & Risk: Cautiously Optimistic of Echo Bubble whilst Securing Profits

• 💰 Trade Wins: TND, DICE, LVL, & Volatility All Feature

• ⛓ On-Chain Sleuthing: DICE Accumulation, Discounted Hoodlifes, & Milady Drama

• 🔬 Rollups & the importance of Data Availability: Optimistic vs. Zero-Knowledge Rollups

• 🤖 Shiny New Bots in The Castle: GBC Opensea Listing & CoinGecko Token Listing

🔑 Key News

• SBF started a Substack, going on and on about how he’s not at fault. Not worth a read but if you have time to spare it’s some nice drama - in the meantime they apparently recovered $5B worth of assets for FTX

• Some notable partnerships this week - including Avalanche x AWS, Coinbase partnering with RocketPool’s oDAO, Avalanche supporting Platypus Stablecoin, and Alchemy being 1 of Visa’s OSP

• Crypto is still being adopted by nations - examples include Norway using Arbitrum for shareholder management, Iran & Russia having plans to issue a stablecoin backed by gold, Thailand’s virtual bank plans, Seoul government launching their metaverse, Ukraine’s Vice PM being bullish

• Very interesting innovation of the zkRouter by Multichain

• Some important progressions being made by projects - such as BoredApes launching Sewer Pass, Azuki releasing their virtual city Hilumia, Aave launching v3 this week, Shibarium news, Sushi’s CEO revealing their 2023 roadmap, Polygon having a successful upgrade, Polkadot’s XCMv3 update and some major changes regarding Starknet

• Overall, narratives-wise, people are talking about LSDs and AI tokens still, but have been seeing some new ones including decentralised betting platforms (Rollbit etc.) and middleware implementations (Eigenlayer)

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

🔥 Hot Narratives

Riding narratives continues to be the best way to make a profit on swing trades in this environment. Even as we enter more bullish phases of the market, new money is not entering into crypto. We are still in PvP mode, it’s just those with money on the side are degen enough to start betting here, and bigger than before. Therefore, let’s highlight some of the developing narratives of the past week or so…

Online Casino

Gambling is the life blood of a degen. It is one of the key human traits that GCR will continue to bet on. The question is, whether leverage trading 1000x FOREX or trading shitcoins on a DEX is enough of a hit for these animals. The online casino narrative is a bet on some of this degen population flowing to purpose built decentralised gambling arenas. A couple projects we are watching are Rollbit ($RLB) and Risky.lol ($DICE).

BSC DeFi

In recent weeks we have seen BSC have a revival in the DeFi space, with several forks launching on the chain, but with upgraded UIs and contracts rather than the vanilla forks we have seen everywhere else. BSC has a huge user base that may finally be catching up with the rest of us EVM DeFi degens. A couple notable projects we are watching are ThenaFi ($THE) [Solidly fork] and Level ($LVL) [GMX fork].

Liquid Staking Derivatives (LSD)

This has been written about almost everywhere over the last few weeks due to the upcoming Shanghai upgrade to Ethereum (Staked ETH unlocks), so I won’t go any further here. Apart from the obvious Lido ($LDO), Rocket Pool ($RPL), and Frax ($FXS), we are watching Plutus ($PLS) and Bifrost ($BNC) as smaller cap plays.

Artificial Intelligence (AI)

Ever since chatGPT hit our screens AI tokens have been heating up. We haven’t spent too much time following this ourselves but there are several coins available almost anywhere if you are into bidding - all performing well over the last few weeks.

📈 Macro Outlook

Past Events

• 01-04 FOMC Meeting Notes : Repeating hawkish stance

• 01-05 Initial Jobless Claims : Labour markets are strong

• 01-06 ISM Non-manu. PMI :

• 01-10 Powell’s speech : Spoke about political independence regarding FED policy

• 01-12 CPI and Jobless Claims : Inflation downwards trending

• 01-18 BOJ Policy Release : Rumors of YCC bands being pulled back again, but resulted in no policy changes. A more hawkish BOJ is bearish for US equities and risk on assets.

• 01-18 PPI and Retail Sales : Underperformed the consensus by a large margin. Bad news now starting to be accepted as bad news by the market.

Coming Events

• 01-25 TSLA & MSFT Earnings : Earnings misses may lead to general re-pricing of risk-on assets

• 01-26 AAPL Earnings : Same as above

• 02-01 FOMC Meeting : Currently 98% chance of a 0.25% increase in rates. Little uncertainty in Fed policy atm.

BTC and Macro

BTC is still behaving like a risk-on asset rather than a non-productive asset like Gold or Oil. We may see a transition towards this kind of price action in the future.

Options Markets

Volatility metrics proved to be a good signal prior to large moves once again. 7d and 14d vol reached historic lows which predicated the crash in Oct. 2018. Long periods of compressed volatility lead to violent movements in price due to short(or long)-covering in the futures markets and the gamma squeeze effect in the options market.

Term Structure

ATM IV has spiked significantly over the past week similarly to the FTX collapse. IV levels have likely peaked and it is unlikely we see another move of similar magnitude.

ATM IV term structures which were in backwardation the previous week are now back in contango albeit very kinky around the 2nd of Feb for the FOMC meeting. Considering the 98% probability of a 0.25% hike, this elevated IV level may simply be residual volatility expectations spilling over to the next few weeks.

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

📉 HTF Price Action Scenarios

This week we finally saw some green in the crypto markets! However, as always, it's important to zoom out and look at the bigger picture.

ETH 1W

The weekly chart continues to be bearish, therefore from a simplistic point of view, it's more probable to see downside continuation. That being said, the weekly range is quite large, with space to the upside towards $3,600 ETH.

ETH 1D

The daily chart shows a nice move up, now interacting with the daily supply zone having already seen a reaction off of it. For now, order flow is clearly bullish on lower timeframes (LRT and I won't be calling for downside continuation until we see a break of the protected low at 1.4k.

ETH 4H

Here are a few scenarios that make sense:

1. We're in a HTF downtrend, so I'm expecting LTF distributions. I am therefore looking for weakness in those LTF trends at key levels where we are right now. Either the daily supply will hold and we continue down from here, or we can grab some liquidity above the daily high (1) before continuing lower.

2. We might see a stronger relief rally and continue towards (2). There I would once again look for LTF distributions in order to reverse down. In this scenario, I would expect (2) to get liquidated before price dumping.

3. If price action continues showing strength above (1) we might see a new daily trend forming. In this case, my targets would be (3) and (4) and I'd be looking to get involved on a pullback.

Right now the price action seems bullish, and it makes sense to look for accumulations above the protected low at 1.4k. Bullish thesis invalidated once 1.4k breaks.

Courtesy of 0x_Vlad

🏰 Castle Capital Positioning and Risk

Although each member of The Castle will have different net worths, portfolio targets, and levels of risk tolerance, we can all agree that crypto is still PvP, like most of the last year. Therefore, aside from long-term investments, we try to follow narratives and emerging primitives in order to gain an edge, whilst respecting the macro and some key HTF horizontal levels. Securing profits needs to be a well-trained part of anyone’s investment or trading journey.

The price action narrative at the moment is very much around an echo bubble, with several respected traders and investors backing this idea. It’s hard to disagree with them seeing the bullishness of crypto despite some weeks of bad news (e.g. Genesis bankruptcy). Nevertheless, everyone must be as risk-on as they are comfortable with. The stable positioning in The Castle ranges from 0% to 80 dependent on this tolerance showing their is no ‘one-size-fits-all’

Personally, I am >50% exposed, mainly to longer-term investments, but took some large profits on several over-extended alts prior to xmas. Also playing shorter-term swing plays based on narratives. I’ll work towards giving a better insight into our positioning as a group as we produce more Chronicles.

💰 Member Trade Wins

TND Launch Trade (SnipeMonke)

DICE - Whale Capitulation Trade (Vlad & others) - several in from much lower ;)

Long Volatility Trade (HanSolar)

Canto Trade (CJ)

Rollbit Call (Cryptopleb4)

SnipeMonke Pulls Out a 5 Sigma Call Option KEK

Highlight from Q4 2022

Riding spot and perp DEX narrative post-FTX meltdown (Castle OGs)

• GMX (swing bags $35 → $60)

• MVX (full bags $1 → $4)

⛓ On-Chain Sleuthing

Whale Game around $DICE

For 2 weeks, we have seen lots of on-chain activities regarding a small cap (below 2 million MC) on Arbitrum, Risky.lol ($DICE). This decentralised gambling application has caught the interest of a few Arbitrum Whales...

Bizyugo, the second-highest score on DeBank, with a $25m portfolio, threw 5 ETH at DICE on 13 Jan. Subsequently, several GMX whales (6-7 figures of staked GMX) have been buying the token. For example, 0x26c...a660 aped 12 ETH in one transaction, and the 5th largest GBC holder scooped 0.8 ETH worth.

4th Largest GBC Hodler Accumulating Hoodlife Club NFT Below Mint Price

For 10 days, the wallet has been aggressively buying discounted Hoodlife Club NFTs. Most of the bids have been layered by this wallet and an associated wallet.

GCR / Crypto Kaleo Milady Drama

Minutes after Crypto Kaleo stated his bullishness on the Milady floor price, he showed a GCR wallet buying 9 Miladys. Looking on-chain we can see Kaleo (0x6434...e554) shamelessly shilling his own project Wonky Stonks by sending 2 of them to GCR. Since then, we have seen the Milady floor increase rapidly by 80% with heaps on attention on both collections.

Research and analysis from Cl

🔬Rollups & the Importance of Data Availability

Every week I'll try to select a technical discussion taking place in the community and condense the learnings into a mini-research piece with the help of a topic 'expert'. This week it's data availability within different rollup technologies.

Rollups and Proofs

You probably all know that rollups (L2s) take the transactional burden away from Ethereum and post finalised proofs back to the Mainnet (L1). For Optimistic Rollups (OR), fraud proofs are used. With fraud proofs, the smart contract (on L1) where the proof is posted, will accept any state difference (from the L2) due to its ‘optimistic’ nature. However, ORs always need one honest watcher (N+1) in the network in order to show proof if an invalid transaction is suspected.

A Zero-Knowledge Rollup (ZKR) serves the proof as a validity proof. Validity proofs are computed off-chain, and then compressed. Their security is embedded in mathematics and has 2^x bit security. Hence, they can give faster finalisation than fraud proofs without requiring an economic bond for security. There are trade-offs however, as ORs are more readily compatible with projects built on the EVM, and posting for finalisation is relatively costly for a ZKR. These are the two main reasons ZKRs are lagging in adoption in comparison with ORs.

The Data Availability Problem

For a fraud proof, all transactional data since the last settlement to the L1 must be readily available to solve all potential disputes. This dataset can grow very large, highlighting the importance of data availability for ORs.

On a ZKR, the rollup only needs to worry about censorship resistance, as the data is already validated through the validity proof of the state-change of the rollup. However, currently we must assume two things:

1. The sequencer is not front-running our transactions

2. The validator(s) does not censor our transactions

The sequencer orders all the transactions on the L2, hence they can order them in a different way to capture value. Currently a lot of research is performed to decentralise the sequencer and reduce the risk of front-running that can be achieved.

The validator(s) validates and finalises the transactions of the rollup, just like they do on the mainnet of Ethereum. Even so, these validators can choose to not include certain transactions, for example, as currently observed with 71% of Ethereum mainnet validators not including transactions on the OFAC-list. Decentralisation of the validator set in rollups is also a huge topic of research within the L2 ecosystem.

ORs vs. ZKRs

For ORs, it is vital to guarantee the certainty of data due to the problem mentioned above. Conversely, for a ZKR, the decentralisation of the node operators (sequencers, provers and validators) takes precedence to ensure security and mitigate the assumptions made. That being said, data availability guarantees are required on a ZKR for permissionless exits to an L1. Therefore, data availability solutions will become ever more important with the adoption of the L2 ecosystem, whichever rollup technology prevails. We are slowly transitioning from TPS (transactions per second) and execution as the bottleneck, and towards not having all the data of L2s readily available to prove the L2 settlements are correct. With EIP-4844 on the roadmap after Beacon Chain withdrawals, lots of improvement regarding data management within Ethereum is anticipated.

Research from Herres

🧵 Castle Threads

Shogun Analyses his STFX Dune Dashboard

Relied covers the STFX Raise

🤖 Shiny New Bots in The Castle

A little teaser as to what is hidden behind our drawbridge...

Some awesome new bots with dope embedded messages have recently landed in The Castle - a nice change from all the staking bots 😅

GMX Blueberry Club (GBC) Opensea Listing

CoinGecko New Token Listing

Castle Capital has been growing organically for over a year now. It is not often we add new members but when we do, we expect them to make an immediate impact and boost the community via their own area of expertise. We are only small and will likely stay this way, however, we always have our eyes out for chads in the space. You may be hearing from us soon...

Bots developed and maintained by SnipeMonke

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 rest of Castle Capital