Valuing Digital Assets in a Fund: DLOM, Staking, and Locked Tokens

Digital asset funds face a valuation problem that most of the fair value literature wasn't originally written for. ASC 820's fair value hierarchy assumes reasonably functioning, observable markets exist for most assets most of the time. Crypto breaks that assumption constantly — through lock-ups, vesting schedules, thin order books, and income mechanics like staking that don't map cleanly onto traditional interest or dividend income. This article walks through the three areas where I spend the most time with digital asset fund clients: discounting locked tokens, recognizing staking income, and building leveling documentation that holds up.

Discount for lack of marketability (DLOM) on locked tokens

A token that's freely tradable today and a token that's economically identical but locked for twelve months are not worth the same amount — the locked position carries price risk, opportunity cost, and forced-holding risk that the liquid version doesn't. A discount for lack of marketability (DLOM) quantifies that difference, and getting it right requires more rigor than an arbitrary "20% off" haircut, however common that shortcut is in practice.

Two general approaches hold up better under audit scrutiny. The first is an option-pricing model, where the lock-up is treated analogously to a protective put the holder can't exercise — the model estimates what it would cost to hedge the price risk over the restriction period using the token's observed or implied volatility, and that hedge cost becomes the basis for the discount. This approach is defensible because it's grounded in observable volatility rather than a rule of thumb, and it naturally produces larger discounts for more volatile tokens and longer lock-ups, which matches economic intuition.

The second is an empirical approach, referencing observed discounts on actual secondary-market transactions of similarly restricted tokens or comparable restricted securities, when such data is available. Empirical data is compelling to auditors when it exists, but genuinely comparable transactions are often scarce for a specific token, which is why option-pricing methods tend to be the more broadly applicable tool.

Whichever method is used, the discount needs to be tied to the token's specific unlock schedule (a single cliff vs. a graduated vesting curve produces different risk profiles), its historical and implied volatility, and the size of the position relative to daily trading volume. A single blanket DLOM percentage applied across an entire portfolio of differently-structured token positions is exactly the kind of shortcut that draws auditor pushback.

Recognizing staking and validator income

Staking rewards raise a genuine recognition-timing question: is income earned when a validator successfully proposes or attests a block, when rewards vest or become unlocked, or only when they're claimed and transferred to a liquid, controllable wallet? Different digital asset funds have reasonably taken different positions here, which is exactly why a documented, consistently applied policy matters more than which specific answer you land on.

A defensible approach generally recognizes income as it's earned on-chain (aligning with an accrual-basis view consistent with other investment income), while separately tracking the liquidity status of accrued-but-unclaimed rewards so the balance sheet clearly distinguishes liquid from illiquid staking receivables. This also matters for valuation: unclaimed rewards subject to their own unlock or slashing risk may themselves need a fair value adjustment distinct from the underlying staked principal.

Slashing risk — the possibility of losing staked principal due to validator misbehavior or downtime — is a related consideration that's easy to overlook. A fund staking through a third-party validator should document that counterparty's track record and any insurance or indemnification provisions, since that materially affects the credit risk embedded in the staked position's fair value.

Building leveling documentation that survives audit

Every token position ultimately needs an ASC 820 level assigned, and for digital asset funds this is rarely a trivial Level 1 exercise. A genuinely liquid, exchange-traded major token with deep order books across multiple venues can reasonably sit in Level 1. A token from a private allocation, subject to lock-up, or trading only on thin or single-venue markets typically belongs in Level 2 (if priced using observable but indirect market data) or Level 3 (if the fund is relying on its own unobservable assumptions, as with most DLOM-adjusted positions).

The documentation that makes this defensible includes: the specific market(s) referenced for the base price, the rationale for the chosen DLOM methodology and its key inputs, the unlock schedule driving the discount period, and a record of any change in circumstances (a token unlocking, a market becoming more liquid) that would move a position between levels. Auditors reviewing a digital asset fund for the first time are often building their own comfort with the asset class in real time — a fund that arrives with this documentation already organized moves through the process meaningfully faster than one that doesn't.

The broader principle

None of digital asset valuation requires abandoning GAAP fair value principles — it requires applying them carefully to an asset class that markets, and auditors, are still building conventions around. Funds that invest in rigorous, well-documented methodology now are the ones that will have the least friction as digital asset accounting standards continue to mature.

Managing a fund with locked tokens, staking positions, or thinly-traded digital assets? Get in touch to talk through a valuation approach built for your specific portfolio.

Related: fund accounting for crypto & digital asset funds and understanding ASC 820 fair value levels.