How CVaR Sets the Vault Discount
CVaR 97.5 for the main vault, CVaR 90-95 for asset manager vaults with first loss. How the confidence level determines how deep the vault bids below NAV.
What CVaR Measures
CVaR (Conditional Value at Risk) answers one question: in the worst outcomes, how bad does it get? If CVaR 97.5 is 4.8%, that means in the worst 2.5% of historical days, you lose 4.8% on average.
CVaR anchors the discount but does not equal it. The total discount is always wider because it also has to cover illiquidity, model error, and redemption friction. The gap is your cushion.
The red bars show the raw tail risk. The colored bars show the full discount the vault bids at. The gap is the excess cushion that absorbs everything CVaR does not capture.
Two Tiers
Main vault: CVaR 97.5. Basel III standard. No first loss. LP capital is fully exposed, so the discount has to be wide enough to cover the tail. Covers all listed assets.
Asset manager vaults: CVaR 90-95. The manager puts up first loss capital. If the vault buys a token and NAV drops, the manager loses money first. That lets the vault bid tighter. Sellers get a better price, depositors have a loss buffer.
The main vault carries a larger CVaR component and wider model error buffer because it has no first loss protection. The asset manager vault can run tighter because first loss capital absorbs the tail.
Why Basel III
Basel III switched from VaR 99 to CVaR 97.5. VaR tells you the threshold: at 99% confidence, losses will not exceed X. CVaR tells you what happens when they do: the average loss in the tail. CVaR is harder to game because it cares about the shape of the tail, not just the cutoff.
97.5 is not a random number. It is the global regulatory standard for bank tail risk. The main vault uses it because LP capital is unprotected and the discount has to cover worst case scenarios on its own.
Asset manager vaults run at CVaR 90-95 because the first loss tranche covers what the lower confidence level does not. Discount plus first loss ends up roughly equivalent to CVaR 97.5 on its own.