The Case for a Validator Network
When a bank lends against a Level 3 asset, an asset with no observable market price, someone has to periodically decide what that collateral is worth to determine whether a margin call is triggered. The bank produces that number. Regulators require it to be independently verified. The infrastructure for that verification is slow, expensive, and breaks under stress. This paper describes what Ravariant is building to replace it.
1. The Problem
Some assets do not trade on exchanges. Private credit loans, PE fund interests, CLO equity tranches, real estate debt, infrastructure projects. These are not publicly traded securities. There is no last trade price. No order book. No live quote. When someone needs a number, a human produces one using a model, a set of assumptions, and professional judgment.
That is fine until someone wants to lend against it. Both sides agree on an initial value when the position is set up. The problem comes after. Once live, someone has to keep marking the collateral. Under most lending agreements, the bank acts as the Calculation Agent, the party responsible for determining the value of the collateral for margin purposes on an ongoing basis. If it marks the collateral down, it triggers a margin call that protects the bank. If it marks it up, it keeps the trade alive and the fees flowing. The conflict is structural.
Every regulatory framework that touches this arrives at the same conclusion. Banking regulators say verify marks independently, monthly, using multiple sources. Derivatives agreements say when the two sides disagree, third party quotes bind. Accounting standards say marks on illiquid assets require extensive disclosure precisely because they are hard to verify. Federal regulators say the model must be validated by someone with no stake in the output. Lending agreements say dealer quotes override the bank's mark when disputed.
The bank marks the book. That is the default. But the mark must be independently verifiable, and when challenged, independent quotes override it. The standard is not disputed. The implementation is broken.