The puzzle is harder to solve than to find.

It is near the big castle (but not inside the castle).

It is behind the castle.

Look at the rusty ship parts in the water.

See those orange things in the water? Notice the gap between the starting circle and the end point.

You need to fill the gap in the circle and the gap between the start point and end point.

The "filler" has to be the same colour as the circle and the line.

You need to "ghost ride" the boat. There are probably a few ways to do it, but here's one:

Stand on the dock below the treehouses. From outside the boat, tell the boat to go counter clockwise to the quarry.

As soon as the boat starts moving, stop it immediately. (This might require a few attempts.) Set it to its slowest speed, and watch it crawl away.

Then run! Through the treehouses, through the castle and to the couch. At speed #1, you'll beat it by a longshot.

When the boat passes behind the hole in the circle, start drawing your line. Your line will hop onto the boat and travel across the gap to the end point.

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You need to have something moving.

It is not on the wrecked ship.

Look at the view from the couch on the cliff.

It's the boat.