Discount
Only Applied If Settlement Fails:The Failure Case
The discount is the second output of RAVA's VaR Oracle. Unlike the haircut (which is always applied), the discount only becomes relevant when something goes wrong.
When Discount is Used
The discount is NOT applied upfront. It only matters when:
- Settlement fails
- The clearing system must replace the position
- The clearing system must finance the gap
- The clearing system must exit/liquidate before delivery
In normal conditions, no discount is realized. The discount is the cost you hope to never pay.
The Formula
Execution Price = Market Value × (1 − Discount)
Example
A $100M private credit position fails to settle. The clearing system must exit.
- Discount: 42%
- Execution Price: $100M × (1 − 0.42) = $58M
The position is liquidated at $58M. The $42M loss is absorbed by the margin that was posted (the haircut).
This is why the haircut exists:so that when the discount is realized, the loss is already covered.
Discount Components
Discount = S + D(t) + E
The discount includes everything in the haircut, plus execution costs.
Static Component (S)
Same as haircut:structural factors inherent to the asset.
Dynamic Component (D(t))
Same as haircut:market factors that can be hedged.
Execution Costs (E)
Additional costs incurred during forced liquidation:
- Market impact:Selling into an illiquid market moves prices
- Time-to-exit:Longer exit means more exposure to adverse moves
- Adverse selection:Buyers know you're a forced seller
- Slippage:Execution price worse than quoted price
Range: 2-15% depending on asset liquidity
Execution costs apply only to the discount, not the haircut.
The Gap: Discount Minus Haircut
| Asset Class | Haircut | Discount | Gap (E) |
|---|---|---|---|
| Treasuries | 1-3% | 2-5% | 1-2% |
| Infrastructure | 8-12% | 12-18% | 4-6% |
| Private Credit | 10-15% | 15-25% | 5-10% |
| Real Estate / PE | 15-25% | 25-40% | 10-15% |
The gap widens as liquidity decreases.
For treasuries, you can exit in seconds with minimal impact. For illiquid PE, forced sale conditions impose massive additional costs.
The T+2 Token Example
For a T+2 token:
Normal case (no discount):
- Day 0: Trade executed, 10% haircut posted as margin
- Day 2: Settlement succeeds, margin returned
- Discount: Never realized
Failure case (discount applied):
- Day 0: Trade executed, 10% haircut posted as margin
- Day 2: Counterparty fails to deliver
- Day 2+: Clearing system must replace position at 15% discount
- Result: 15% loss absorbed by the 10% margin (5% shortfall from default fund)
The haircut exists to ensure that if the discount is realized, losses are absorbed without breaking settlement.
Why Discount is Always Greater Than Haircut
Discount = Haircut + Execution Costs
Execution costs are always positive. You cannot sell a forced position for MORE than orderly market value.
When traditional finance uses the same number for both:
- Using haircut as execution price → Underestimates liquidation losses → Clearing shortfalls
- Using discount as haircut → Overcollateralizes → Destroys capital efficiency
RAVA separates them for good reason.
Discounts by Asset Class
| Asset Class | Typical Discount | Execution Cost Drivers |
|---|---|---|
| Treasuries | 2-5% | Minimal:deep markets, instant exit |
| Infrastructure | 12-18% | Moderate:specialized buyers, longer timeline |
| Private Credit | 15-25% | Redemption queues, gating, limited secondary |
| Real Estate / PE | 25-40% | Quarterly liquidity, negotiated sales, long process |
Products That Use Discount
Standing Bid
The Standing Bid product guarantees exit at the discount price. Holders can always sell at:
Standing Bid Price = NAV × (1 − Discount)
This provides guaranteed liquidity for otherwise illiquid assets.
Liquidation
When a position must be liquidated, the discount determines the execution price. The margin (haircut) ensures the loss is covered.
Key Insight
Haircut is insurance you always pay.
Discount is the cost you hope to never realize.
The haircut protects the system before default. The discount protects the system during default. Both are necessary for safe, efficient clearing.