Discount Token Fund

Secondary Liquidity When Primary Channels Are Constrained

The Discount Token Fund (DTF) is a secondary exit path for tokenized assets. When the Standing Liquidity Facility reaches capacity constraints, the DTF provides an alternative route to liquidity by pooling discounted positions and managing them for recovery.

The Problem

The Standing Liquidity Facility has finite capacity. It holds USDC reserves to purchase assets at the discount price. During severe stress, exit demand can exceed available reserves.

Without a secondary path, holders face a choice: wait for facility capacity to replenish, or hold an asset with no immediate exit. Neither option provides liquidity when it is most needed.

The DTF solves this by absorbing overflow demand and converting illiquid positions into tradeable claims.

How It Works

Step 1: Submit Position

When the Standing Liquidity Facility is at capacity, holders can submit their tokenized asset to the DTF instead.

Step 2: Receive DTF Tokens

The DTF issues tokens representing a pro rata claim on the pooled assets. If you submit $100M in tokenized private credit at a 35% discount, you receive DTF tokens worth $65M at current valuation.

Step 3: Hold or Trade

DTF tokens are liquid. You can:

• Hold them and wait for asset recovery
• Sell them in secondary markets at the current market price
• Use them as collateral in DeFi protocols

Step 4: Recovery Distribution

As underlying assets mature, redeem, or are sold, proceeds flow to DTF token holders proportionally. Recovery typically exceeds the initial discount, creating upside for patient holders.

Pricing

DTF tokens trade based on expected recovery value. The market determines the price through supply and demand.

Initial valuation: Based on curator derived discount at time of submission

Market price: Fluctuates based on:

• Recovery prospects of underlying assets
• Time to expected realization
• Market risk appetite
• DTF management performance

Example:

• Submit $100M private credit at 35% discount
• Receive DTF tokens valued at $65M
• If market expects 90% recovery, tokens might trade at $72M (10% premium to discount)
• If market expects 60% recovery, tokens might trade at $55M (15% discount to initial valuation)

Comparison to Standing Liquidity Facility

Use Cases

Overflow during stress: When market wide stress exhausts Standing Liquidity Facility capacity, the DTF absorbs excess exit demand.

Patient capital: Holders who believe assets are undervalued can accept DTF tokens instead of selling at the discount price, capturing recovery upside.

Liquidity transformation: Convert illiquid positions into liquid tokens that can be traded, borrowed against, or used in DeFi.

Portfolio rebalancing: Exit specific positions without waiting for fund redemption, even when primary liquidity channels are constrained.

Recovery Process

The DTF actively manages pooled assets to maximize recovery:

Redemption pursuit: Submit redemption requests to underlying funds when gates open

Secondary sales: Sell positions in secondary markets when pricing is favorable

Workout participation: Engage in restructuring or workout processes for distressed assets

Distribution: Distribute proceeds to token holders as recovery materializes

Recovery typically occurs over months to years depending on asset type and market conditions.

Token Mechanics

Minting: DTF tokens are minted when assets are submitted. Mint amount equals asset value at curator derived discount.

Burning: As recovery proceeds are distributed, corresponding tokens are burned.

Trading: DTF tokens trade freely on secondary markets. No lock up periods.

Governance: Token holders can vote on recovery strategy decisions for pooled assets.

Example: Stress Scenario

Market stress causes widespread exit demand. The Standing Liquidity Facility exhausts its $500M USDC reserves.

A protocol holding $50M in tokenized private credit needs to exit. The facility is at capacity. Options:

Option 1: Wait

• Wait for facility capacity to replenish
• Unknown timing, continued exposure to underlying asset

Option 2: Submit to DTF

• Submit $50M position at 35% discount
• Receive DTF tokens worth $32.5M
• Can sell tokens immediately in secondary market for ~$28M (market trading at 14% discount)
• Or hold for potential recovery exceeding initial discount

The DTF provides exit when primary channels are blocked, at a price determined by market assessment of recovery prospects.

Relationship to Routing Function

The DTF is part of RAVA's routing function. When constraints bind:

1. First choice: Redemption through fund gate (best price, NAV)
2. Second choice: Standing Liquidity Facility (immediate USDC at discount)
3. Third choice: Discount Token Fund (liquid tokens, market price)

Each path offers different tradeoffs between price certainty, timing, and recovery potential. RAVA routes flow to the optimal path given current constraints.