💥Correction: The Ghost of RadioShack Past💥

Repeat: how long before bankruptcy professionals encounter the crypto bros?

RadioShack Corp., the specialty electronics business that filed for bankruptcy twice (2015 and 2017) is BACK, baby.

And in the most 2022 way possible.

Which means that, obviously, it is relaunching as a cryptocurrency exchange.

Per its ICO white paper (no, we are not kidding 🙄) RadioShack’s new mission is…well…we’ll let their (hilarious) words tell the tale:

“The most important day for any new emerging technology is the day on which it “crosses the chasm.” The moment of mass adoption among even the most skeptical consumer.

Until the iPhone, Tesla self-driving car, or Amazon.com crossed the chasm they were but an embryo in the economic womb. But after that crossing, they became trillion dollar assets (or close to it). We intend RadioShack to be the first protocol to pass over into mainstream usage in the history of DeFi.”

“An embryo in the economic womb?” For f*ck’s sake, y’all. 🙄🔫

The white paper looks back nostalgically on RadioShack’s heyday and attempts to leverage the (supposed) power of “a 100 year old brand name that’s recognized in virtually all 190+ countries in the world.” The white paper also reminds readers that RadioShack once had “over 8,000 stores []in the U.S alone.” Despite RadioShack’s fall from grace, “its recognition has hardly diminished and is still active in South America, the Middle East, and online globally as an e-commerce store.” Whatever.

So, what is this “DeFi” thing they speak of? Generally speaking, DeFi is a new(ish) global peer-to-peer decentralized financial services construct existing on public blockchains (mostly Ethereum) where pseudonymous participants (if they wish) can borrow, lend, earn interest, and perform all sorts of other financial transactions on “decentralized exchanges” (DEX) allegedly without the associated third-party middlemen (i.e., like banks, brokers, payment processors) and inefficiencies (i.e., cost and time) of Wall Street. The DEXs are supposed to be faster and more open, private, and flexible than traditional financial institutions. We’re not going to opine on whether those assertions are accurate, though two things can apparently be true at once: billions of dollars can transact in DeFi (like they did in ‘21) while billions of dollars can also be stolen in DeFi (like they were in ‘21). On the latter point, just last week blockchain analytics firm Chainalysis released a report indicating that “[s]cammers took home a record $14 billion in cryptocurrency in 2021, thanks in large part to the rise of decentralized finance (DeFi) platforms….” This seems like just the type of space a twice-bankrupt company would want to go. 🚀

You might be wondering: how do DEXs differ from Coinbase Inc. ($COIN), the most well-known crypto exchange? The answer is that, unlike COIN, they don’t transact between fiat money (read: dollars) and crypto; rather, they transact (or “swap”) crypto tokens for other crypto tokens with transactions settled directly on the blockchain. Per Cointelegraph.com, these exchanges use (i) smart contracts (read: code), where relative pricing of cryptocurrencies is established algorithmically and without the use of an intermediary (such as a bank), and (ii) “liquidity pools” created by investors who lend funds in exchange for interest-like rewards. According to COIN, millions of people have transacted via DEX and, in the first quarter of ‘21 alone, a staggering $217b in transactions flowed through DEXs. 🤯

So what, other than a brand name and a healthy dose of unnecessary nostalgia, differentiates RadioShack DeFi? In their words:

“RadioShack has one objective: Distribution and usage by millions of individuals but possibly more important, by hundreds of blue-chip, large corporations as their gateway into becoming blockchain companies. Imagine if brands like Louis Vuitton, Starbucks, and Mercedes-Benz utilized the RadioShack protocol for their DeFi projects.”

We feel pretty confident that that statement will stay within the realm of imagination rather than reality. And if you just read that and feel no clearer on what RadioShack DeFi is, well, let us assure you: you’re not alone.

But, as we understand it, RadioShack DeFi allegedly plans to help turn other corporations into blockchain companies. How?

RadioShack is partnering with a treasury provider known as Atlas USV. USV — short for “universal store of value” — will supposedly allow corporations to create their own pools that users (read: the crypto “investor”) can provide liquidity to in exchange for LP tokens. Per the Discord channel “initial liquidity has come organically from people who have bought USV outright or bartered for USV tokens.” The USV barter vests over a 7-day period, and once vested, users can trade the USV token or stake it within the system to earn yield. Per COIN, “staking” is a way of earning rewards for holding certain cryptocurrencies:

“If a cryptocurrency you own allows staking…you can “stake” some of your holdings and earn a percentage-rate reward over time. This usually happens via a “staking pool” which you can think of as being similar to an interest-bearing savings account.

The reason your crypto earns rewards while staked is because the blockchain puts it to work. Cryptocurrencies that allow staking use a “consensus mechanism” called Proof of Stake, which is the way they ensure that all transactions are verified and secured without a bank or payment processor in the middle. Your crypto, if you choose to stake it, becomes part of that process.”

Here’s the breakdown in picture form:

Source: RadioShack DeFi white paper

Let’s pause here for a second. Despite engaging in the mind-numbing experience that is the RadioShack Discord channel, it remains unclear to us how the LP tokens are initially formed and which entity issues them. Perhaps we’re just idiot noobs, but if the goal here is to leverage the RadioShack brand to attract and mainstream crypto neophytes, we’re not exactly off to a great start here. And clearly we’re not alone. From the Discord channel:

To summarize what we think is happening here (don’t @ us, this sh*t is confusing AF):

1. Company XYZ — here RadioShack — issues a new token ($RADIO);

2. Crypto user/investor swaps into $RADIO via some other previously purchased cryptocurrency;

3. User trades $RADIO for Atlas USV; and

4. User is free to trade Atlas USV after 7 days or stake it on the platform to earn some seemingly-absurdly-high yield.

By now, you might be feeling like Bunk and Freeman:

Stick with us.

What problem is RadioShack DeFi actually solving, and why should crypto participants care? Atlas USV believes that liquidity is the key to solving the “slippage” problem. Slippage is crypto jargon for a trading scenario where a market participant receives a different trade execution price than intended; it can occur in any illiquid market; it’s apparently particularly common in crypto where high trading volume bumps up against low liquidity.

The question becomes: how does one incentivize participants to provide liquidity to the market? Frankly, it’s not entirely clear from the white paper nor the Discord channel that the developers have even figured this out yet. Indeed, the development team is getting bombarded with questions and they keep holding people at bay.

But, according to the white paper, the problem with the current DEX 1.0 system is that (i) liquidity is super thin (PETITION Note: perhaps because there are a bazillion tokens at this point and only a few of them are even remotely close to mainstream — if you’ve heard of particular cryptocurrencies, those are the one’s we’re referring to, e.g., ETH) and (ii) token holders must be incentivized through dilutive ‘rewards’ to make the platform function properly. Per the white paper:

“…the current major players do NOT own their own liquidity - they rent it - meaning other users provide liquidity to the protocol in return for rewards (normally minted by the DEX in a yield farm)”

There are apparently several negative consequences of this.

First, as the DEX mints its tokens to continuously encourage users to provide liquidity, it dilutes itself, damaging the value of the token through new issuance and not creating any permanent liquidity. The DEX is “just paying the users to park their liquidity in the pool while the rewards are flowing. The moment the rewards stop flowing, the users flee and so does that rented liquidity. A quick spiral to the bottom ensues.“

Second, regardless of how much the DEX incentivizes users to provide liquidity, there’s always churn. “Someone may remove their liquidity to deploy in another more lucrative opportunity, or might even panic sell in a downward market. Fear is a hell of a drug. For each person removing their liquidity from a pool, the DEX has to find someone else to replace that liquidity to achieve the same level of slippage… coined the ‘leaky bucket’ problem.”

Here's some charts RadioShack & Atlas USV use to illustrate the problem. Over an infinite time horizon, slippage on a DEX can never be completely eliminated:

Source: RadioShack DeFi white paper

The only way to achieve deeper liquidity (once saturation is reached), is to increase the reward rate to attract more liquidity providers.

Source: RadioShack DeFi white paper

The whitepaper equates this phenomenon to “a drug addict who sadly needs more and more to get their fix.” Drug addicts and degenerate gambling – what a combo!

Even worse, trading fee dynamics now deteriorate because the larger the pool, the lower the trading fee per pool participant, as the same trading fee is spread thinner among more pool participants. In the DEX 1.0 environment, everyone loses, whether they are liquidity providers, traders, or DEX operators.

PETITION Note: who would’ve thought that such a construct would be riddled with complication? 🤔

RadioShack and Atlas USV are allegedly here to save the day. Or something.

In this new swap paradigm construct, “Atlas USV owns the assets in its treasury — it doesn’t rent them. And the same goes for RadioShack LP tokens collected by Atlas USV.”  The whitepaper argues that “RadioShack Swap’s new permanent liquidity accumulation model will beat DEX 1.0’s liquidity renting model each and every time.” 

Caveat that we still don’t understand exactly how the liquidity is owned. Nobody has been able to explain it to us on the Discord. However, assuming mechanics hold up as advertised, this new DEX … like … maybe … kinda, sorta … conceptually makes sense…? If the liquidity doesn’t leave the platform, “the total liquidity pool level always increases and never maxes out.” The implications of this are that “once RadioShack surpasses a DEX 1.0’s liquidity level in ANY token pair, it will become unbeatable in swap efficiency for that pair.” In contrast, a 1.0 DEX remains capped and will never achieve this swap efficiency no matter what it does to incentivize or reward pool participants.

Source: RadioShack DeFi white paper

The bottom line is that Atlas USV will purportedly allow users to swap into any currency pair they choose, with fewer steps, lesser emissions (gas fees), and more liquidity to support better execution and larger blocks. Sounds good…we guess…?

*****

All of this begs the question: is RadioShack DeFI a more efficient architecture? Its developers have drawn a diagram ⬇️ outlining the typical DEX ‘liquidity dispersion’ model (read: how easy it is to switch from one currency to another using DEX 1.0).

Source: RadioShack DeFi white paper

The diagram above frames which liquidity pairs are the deepest. Solid lines denote large size liquidity pools, thinner lines denote medium size liquidity pools, and dotted lines show very shallow liquidity pools. What’s clear from this diagram is that some currency pairs can’t be directly exchanged. For example, market participants in today’s system could never swap directly from the $MATIC cryptocurrency to the $DAI token: there’s simply no direct path. Users would need to use a bridge or swap protocol, or another form of intermediary.

Swapping directly from $USDT (i.e., Tether, for those of you who’ve heard of it) to DAI is possible, but liquidity is extremely tight, which translates into high slippage. An alternative path can be charted from USDT > USDC > WETH > DAI. This path “avoids very low liquidity edges…but involves 3 hops of varying degrees of liquidity.” Not to mention gas (read: a fee) is paid at each transfer.

RadioShack DeFi believes it has discovered the solution, which it dubs “The Starfish Topology.” The new liquidity dispersion protocol is depicted below:

Source: RadioShack DeFi white paper

In the Starfish Topology, RADIO serves as the central node bridging all of these tokens together. The previous 4-step ‘max liquidity’ process of converting USDT > USDC > WETH > DAI can now be simplified to a 3-step process USDT > RADIO > DAI through a DEX with owned liquidity. RADIO’s centralized position in this ecosystem is a highly advantageous place to be. According to the whitepaper, “in the Starfish Topology, as more new tokens are added, the Starfish grows more limbs, and therefore the demand for the RADIO token increases accordingly. The RADIO tokens are locked in more and more pools to provide an efficient swap path for all tokens in the ecosystem.”

In summary, the project appears to be attempting to (at least incrementally) solve some (seemingly) real pain points within the DeFi ecosystem. Or these bros just took a diagram of the current construct that has four steps and were like, “hey, let’s just draw it simpler with only three steps and we’ll look genius.” Honestly, we have zero clue: it could be either one.

Indeed, despite all the above mumbo jumbo (or, perhaps because of it), we feel like there’s reason to be skeptical.

RadioShack DeFi feels like a combination and an evolution of degenerative themes we identified earlier with meme stocks and GM WAGMI. Distressed retailers have brand value — look no further than reviews for Netflix’s documentary The Last Blockbuster. Thus, they become a prime target for crypto projects that must develop a community following quickly in order to build momentum and enthusiasm. To point, RADIO’s emergence onto the crypto scene appears well-organized. The RADIO community already boasts 1,600 members in the Discord channel and RadioShack’s Twitter account boasts a staggering 170k followers. That’s a lot of people to get behind a comeback story! It sure seems like Atlas USV borrows RadioShack’s global brand value (be it as it may), sprinkles it with a little bit of crypto pixie dust, uses this glint of familiarity to lure in noobs, and then gets them into the Atlas USV ecosystem. After all, 170k followers = a lot of marks. From the Discord:

Compounding our skepticism is the amount of conflicts baked into this one. Digging a bit into the org chart, RadioShack DeFi is affiliated not just with Atlas USV but with Retail Ecommerce Ventures (REV), a holding company with majority ownership of the IP of several brands, many of which were at one point bankrupt, e.g. Pier 1 Imports, Steinmart, Dressbarn, Linens N Things, and Modell’s. REV’s Executive Chairman is social media wealth influencer Tai Lopez, who sells ‘get rich’ courses on his website to his 10mm+ followers; his YouTube business videos have been watched for over 2b total minutes. Having someone like Mr. Lopez as the face of the brand isn’t, in our humble opinion, exactly confidence inspiring for crotchety distressed guys like us. But we respect his hustle: he’s clearly a keen marketer. It’s clear that Mr. Lopez has a plan to leverage an otherwise unfocused brand and use it to tap into cryptomania. If it works, he can also tap into other formerly distressed IP later. All to help engender mainstream adoption of DeFi — or, to be cynical, just focus a spotlight on USV, which, again, it appears he also happens to financially benefit from.

Unfortunately, all the players here may have mistimed their potential grift experiment. Crypto markets took a major tumble below $2T in market cap before rallying back slightly (BTC is down 8% and ETH is down ~15% in the past week alone). It’s not clear how far out the risk curve crypto speculators are willing to stretch for new projects. We’ve done our best to give RADIO a fair shake: we’ve combed through the white paper, joined the community, and directly pinged RADIO’s developers with our many questions. We’re not ready to definitively call this a scam just yet: the developers have assured us that many of our outstanding questions will be answered in due time, with promises of more information to come.

Still, we can’t help but think that crypto’s push into distressed land is just another sign of the times. Whether it’s DistressedDAOs or ReorgCo-backed tokens such as $RADIO (and perhaps later, $SMART, $LINEN and $PIER1), we’re always open to innovation and fresh use cases for formerly-distressed-assets — provided that they are actually legitimate. If the crypto bros want to come calling at bankruptcy auctions, we’re all ears. Their money is green. We just hope that, at the end of the day, that innovation isn’t a cleverly-disguised pump & dump targeted to the mainstream. If it is, you know we’ll come at ‘em guns blazing.

Editor’s Note: in the originally published version that landed in inboxes this morning, we mistakenly included the same “liquidity dispersion” graph twice rather than the second one showing the RadioShack “Starfish Topology.” If our description was, therefore, confusing as hell, the conflicting visual would be the primary reason why. It’s confusing as hell with the CORRECT visual, so…🤷‍♀️. Anyway, apologies.

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🔥 Gary Gensler is a Beast (Short Manufactured Defaults?)🔥

Thanks to the Securities and Exchange Commission, manufactured defaults are a thing again. The SEC has (re)proposed a rule 9j-1(b) on “security-based swaps,” or contracts that fluctuate in value based on the performance of reference securities. Popular examples include the credit default swap (in all of its post-2008 subprime mortgage crisis luster) and the total return swap (remember Archegos?). The new rule seeks to extend the application of traditional securities laws to security-based swaps. The SEC proposed a similar set of rules in 2010, but decided not to proceed with them after a comment period rife with pushback from industry trade groups. So why is Chairman Gary Gensler refocusing on these swaps? A few enterprising hedge funds may have had something to do with that….

*****

A particular type of security-based swap, the CDS, has made waves in distressed circles in recent years because of its connection to the so-called “manufactured default” — i.e., when CDS buyers or sellers use their influence at a company to either delay or accelerate a bankruptcy filing to the benefit of their CDS positions. For example, let’s say Hedge Fund A has bought CDS protection against Company B, but is also a junior creditor of the company. In the event that Company B defaults on its debts, A’s loans to B will be wiped out but since A possesses CDS protection, it’ll mitigate its losses by way of CDS payouts. This illustrates a critical (and valid) use of swaps — to hedge credit exposure.

Let’s continue the game though, and assume that A has nefarious intentions. Assume that A’s economics works out so that it makes more sense for it to allow B to default so that it can collect CDS protection, rather than working to reach a deal with other creditors so that B can emerge from its distressed situation. So, maybe A rallies against a restructuring that would otherwise be in its interests as a creditor.

This can happen in reverse as well: if A was a CDS buyer, and wanted to stave off B’s default, it may offer financing to B to ensure it doesn’t default. Everyone wins, right? Everyone, except the CDS sellers. This is allegedly what happened with RadioShack and one of its creditors around its 2014 filing, long before it rebranded as “Radio Shack DeFi” and went from selling sound systems to offering crypto exchange platforms. (PETITION Note: when RadioShack now speaks of the power of its brand to sell its foray into the cryptoverse, it neglects how the company was once used as a vehicle to f*ck over a whole slate of investors. Any crypto bros who buy into RadioShack’s DeFi bullsh*t may want to hope that history doesn’t repeat itself…see above.). At the time of its bankruptcy filing, the amount of CDS tied to RadioShack was 28 times its debt. Perhaps because of this, a last-ditch financing effort was organized by CDS sellers betting on the company to weather its storm and avoid default.

Or maybe, A is a CDS buyer, and it works out a backdoor deal with B so that B “technically” defaults in exchange for the provision of cheap financing. A gets its CDS payment and B gets its financing on good terms. Seems great, right? Now consider: what if B wasn’t distressed at all, and wouldn’t have defaulted without A’s financing offer? This is what was allegedly at play in the 2018 Hovnanian case, where Blackstone’s GSO entity dangled an enticing financing package to an otherwise healthy Hovnanian to induce it into missing a bond payment and so, triggered a CDS payout to GSO.

Or maybe, A offers financing to B in a way that B’s debt transfers to one of its subsidiaries unreferenced by the CDS, thereby “orphaning” the CDS and rendering it riskless. Or, A sells short-dated CDS, but buys long dated CDS protection, incentivizing it to delay a filing until its short-dated CDS expires and then accelerate it. These strategies are reviled for taking the economic focus away from the company (and its jobs, and purportedly value-generating business, and going concern value) and placing it in realm of endless financial engineering.   

Alvin Foo @alvinfoo

Financial engineering 😂

November 13th 2021

50 Retweets138 Likes

So what’s the issue? This is obvious market manipulation, right? Not so fast. As the dissenting SEC commissioners point out, security-based swaps serve valuable roles in the securities markets. To return to the above example, if A never had a CDS position in B, it may never have been incentivized to offer exit financing. Or, maybe A may not have taken its position in B in the first place without the assurance of a CDS hedge. The SEC’s rule acknowledges these situations by assuring that these rules are intended for actions “taken outside the ordinary course of a typical lender-borrower relationship.” Does that mean it’ll be up to the SEC to make fact-specific inquiries in each instance of possible manipulation? We’re sure the (free) markets will love that.

The breadth of the rule is also a sticking point. Traditional securities are regulated at their purchase and sale, generally requiring disclosure of pertinent information and an affirmative obligation to avoid material misstatements of information. These swaps, however, are proposed to be regulated throughout their entire lifetime. That is, the exercise of any rights and performance obligations during the life of the swap would be subject to SEC regulation. This could be potentially problematic, as any activity dealing with the reference security could trigger a regulatory action under the proposed new rules. Will the resulting uncertainty send shockwaves of chill to market participants using these strategies and so, lead them to bias towards no action?

Should manufactured defaults count as market manipulation, or should they be heralded for opening up market liquidity to entities otherwise doomed for default? You decide. The SEC’s comment period is open for a few more weeks.

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📚Resources📚

We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.