Keystone Defense Fund
Negative funding and liquidation trades — bear markets
Bear market and dislocation fund. Holds stable liquidity as a baseline and deploys capital during bearish market conditions, volatility spikes, and market dislocations. Captures opportunities created by negative funding, leveraged liquidations, and distressed collateral that conventional strategies are trying to avoid.
Keystone Neutral captures funding carry in both directions under normal market structure. Defense operates in a different domain: the tail events that break normal market structure — liquidation cascades, extreme volatility, and sustained negative funding that signals real bearish conviction.
Deployment Modes
Defense has three active deployment modes. They can run simultaneously during severe market stress.
1. Negative Funding Capture
When perpetual funding rates turn negative, short traders pay funding to long traders. Defense enters long SOL-PERP positions to collect these payments from the crowded short side.
Funding is negative → longs receive payments from shorts
Defense enters: Long SOL-PERP on Jupiter Perps
Earns: Funding payments from short traders
Duration: Held while funding remains negative above threshold
Exit: Funding normalizes → close positionReturn driver: Funding yield during bearish sentiment or crowded short positioning.
Admin configuration required: The admin must set min_negative_funding_threshold (e.g. -500 for −0.05%/hr) and max_perp_position_bps (e.g. 3000 for 30% of NAV) via update_fund_params before keepers can open positions permissionlessly. Until set, only the admin can open positions.
Cascade Pre-positioning
Liquidation cascades are predictable. Rising open interest plus elevated leverage in perpetuals markets are leading indicators — the cascade hasn't started yet but pressure is building. Defense can pre-position ahead of it rather than reacting after the spike.
The admin (or keeper bot) calls update_fund_params with cascade_mode = true when these signals are detected off-chain. While cascade mode is active, open_long_position uses cascade_position_size_bps as the position cap instead of the normal max_perp_position_bps. Set the cascade cap higher — e.g. 60% of NAV vs the normal 30% — to absorb more of the incoming funding spike.
Cascade mode always carries a TTL (default 4 hours) and expires automatically. If the cascade doesn't materialize, the flag clears and normal sizing resumes.
cascade_position_size_bps
Position cap during cascade mode (must be ≥ max_perp_position_bps)
cascade_mode_duration_secs
TTL in seconds when activating (default 14,400 = 4 hours)
2. Liquidation Arbitrage
During sharp market declines, leveraged borrowers on lending protocols become undercollateralized and face liquidation. Defense acts as a liquidator — repaying borrower debt in exchange for collateral at a discount.
Return driver: Liquidation bonus + discounted collateral acquisition.
3. Distressed Collateral Purchases
Market crashes create temporary mispricing where collateral assets — particularly LSTs — trade below fair value due to panic selling, oracle lag, or redemption queue pressure. Defense purchases discounted assets and holds until the market stabilizes.
Return driver: Distressed asset discounts + market recovery.
On-chain discount verification: Every purchase is verified on-chain against the Pyth oracle price. The transaction reverts if the market price does not represent a discount of at least min_discount_bps (e.g. 300 = 3%) below fair value. Total USDC deployed in distressed purchases is capped at max_distressed_allocation_bps of NAV. Both thresholds are configurable by the admin.
Capital Allocation Model
Defense maintains liquidity to deploy rapidly when opportunities arise. A typical allocation during active monitoring:
Stable liquidity (USDC / JupSOL)
50–60%
Dry powder for liquidation and collateral purchases
Negative funding trades
20–30%
Long SOL-PERP positions collecting funding
Liquidation dry powder
10–20%
Reserved for liquidation arb execution
Maintaining high liquidity is the core discipline of Defense — the fund cannot participate in liquidation events if capital is deployed elsewhere when the cascade begins.
Automated Cycle
All state transitions are permissionless. The keeper monitors conditions and triggers the appropriate deployment.
Baseline State
When no deployment conditions are active, the fund holds JupSOL and earns staking yield as a passive baseline.
JupSOL staking
~5–8% APY (always active)
USDC in Marginfi lending
~3–5% APY (when lending enabled)
The baseline is never idle — JupSOL continuously earns staking rewards and MEV through Jupiter's validator network.
Deposits
Deposits into the Defense fund arrive as USDC via Keystone Core. The fund uses USDC as dry powder and converts a portion to JupSOL for the staking baseline.
USDC
Held as dry powder or deployed to Marginfi lending / JupSOL staking
Direct deposits to this fund are not supported. All deposits route through Keystone Core, which handles any LST or SOL conversion to USDC before routing here.
Yield Sources
Baseline
JupSOL staking
~5–8% APY
Negative funding capture
SOL-PERP long funding
Variable — active during bearish/crowded markets
Liquidation arbitrage
Liquidation discount
5–10% per event
Distressed collateral
Depeg / dislocation spread
2–5% per event
USDC lending (idle)
Marginfi
~3–5% APY
Crisis mode returns are episodic — they occur during stress events, not continuously. Baseline staking yield is always active.
Market Conditions Where Defense Performs Best
Bear market
Negative funding capture active; baseline JupSOL staking
High volatility
Liquidation arb opportunities increase; dry powder deploys
Liquidation cascades
All three modes active simultaneously
Negative funding
Long SOL-PERP collecting from crowded shorts
LST depeg events
Distressed collateral purchases
Portfolio Role
Bull
Heavy — accumulating SOL
Active — positive basis
Baseline JupSOL staking
Sideways
Core — holding allocation
Active — positive or reverse basis
Baseline JupSOL staking
Bear
Light — reducing SOL
Active — reverse basis
Active — negative funding + liquidation trades
Crisis
Minimal
Lending (circuit break)
Full deployment — all three modes active
Alpha and Neutral generate yield during orderly markets. Defense generates yield from the conditions that break orderly markets. The three-fund lineup covers every major market regime — a depositor holding all three is never idle regardless of what the market is doing.
Risk Profile
Funding normalizes after entry
Position closed automatically when funding recovers above threshold
Liquidation arb position moves against
Hard position limits; exit triggers on loss threshold
LST depeg worsens after purchase
Partial entry; max allocation cap per distressed asset
JupSOL depeg (baseline)
Circuit breaker on deviation > 2% from fair value; exits to USDC
Insufficient liquidity for liquidation
Liquidity reserve (50–60% of NAV) maintained at all times
Smart contract risk (Marginfi / Jupiter Perps / oracles)
Allocation caps per protocol
USDC depeg
Shared risk across all Keystone funds
Fees: 0% management + 20% performance (above high-water mark). No management fee — the fund earns only when it generates alpha. Details →
All three deployment modes are fully implemented on-chain. Follow the changelog for updates.
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