In keeping with our series of articles summarising the Empowa blackpaper in this article we look at how the level of collateral is determined.
Andrew Forson, Empowa’s Head of Quantitative Analytics and Risk, covers this in the below video.
Empower is a platform that allows developers to secure their collateral through the purchase of EMP tokens, which are then held in escrow until the loan has been successfully discharged. The platform’s unique approach to collateralization has significant advantages over traditional methods, including the use of modern web3 technology to liquidate tokens quickly and efficiently.
One key challenge for developers using the Empower platform is calculating the amount of EMP tokens needed to secure their collateral. Empower uses a baseline metric where one EMP token represents $100 of house value, but this can vary based on factors such as the number of bedrooms, bathrooms, along with other features of the home. Each home that is part of a project must be valued to determine the appropriate allocation of EMP tokens.
To account for differences in purchasing power between countries, Empower uses an index based on a basket of 14 highly indebted poor countries as defined by the OECD or an index from the World Bank. This index allows Empower to adjust the value of EMP tokens according to the economic strength of the country in question. For example, in Mozambique, where the economy is generally weaker than the basket of 14 highly indebted poor countries, the value of EMP tokens is indexed down accordingly. Conversely, in a country like Nigeria, where the economy is stronger, the collateral requirements are indexed up.
Another factor that Empower considers when determining collateral requirements is the Ginny index of income inequality. This index allows Empower to factor in the fact that there can be significant differences in income levels within a given country.
The collateral requirement process is handled by the developer, who can purchase the necessary EMP tokens to fulfill the underwriting requirement. In many cases, the price of EMP tokens can be negotiated, and the tokens are held in escrow until the loan has been successfully discharged. If the loan goes into default, the EMP tokens are liquidated, and the funds are used to make investors whole.
Empower’s approach to collateralization is flexible and accommodates national differences in the economy. This is critical when discussing collateral repayments and the risk of default. By using modern web3 technology, Empower is able to execute deals quickly and efficiently, allowing developers to secure their collateral while also providing investors with a liquid asset that can be easily liquidated on multiple markets in the web3 space.
Overall, Empower’s platform is an innovative solution to the challenges faced by developers and investors when it comes to collateralization. By using EMP tokens, Empower is able to provide a more efficient, flexible, and liquid collateralization process that benefits all parties involved.
If you would like to find out more about the above approach check out the full video series explaining the Empowa Blackpaper here or visit the Empowa website at Empowa.io/blackpaper.