3 min readMar 14, 2023
How do we manage project default risk?

Andrew Forson, Empowa’s Head of Quantitive Analytics and Risk, unpacks the impact for token holders should a project default. The video looks at both the risk of losing the supplied EMP as well as the potential impact on the price of the EMP token.

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Video Summary

As with any investment, there are always risks involved, and the case of EMP tokens and Empowa SDRIs (Secure Defined Return Instruments) NFTs is no exception. In the event of a project default, there are questions that community members and token holders may have, such as what happens to their tokens and whether they are at risk of losing them.

It’s important to note that what is at risk during a default is the developer’s collateral. The developer, as part of the underwriting agreement, purchases a prescribed amount of EMP tokens to offset the risk of default. This EMP token is purchased effectively on the open market, and the calculation of the amount is based on a series of EMP collateral index formulas.

For EMP token holders, there is no risk of losing their tokens in the event of default. Under no circumstances will their tokens be burned or lost as a result of project default. The only impact on token holders is the potential impact on the token price. If 99 out of 100 projects default, it’s likely that the tokens associated with those projects will be sold on the open market, leading to a capital depreciation issue. However, the number of tokens that token holders hold will not be affected.

While there is no risk of losing tokens, there are other risks to consider when investing in EMP tokens or Empowa SDRIs. The biggest risk is liquidity risk, which is the risk of holding something that you cannot get rid of because there’s no market or no one wants to buy it from you. This is a significant risk for token holders, and it’s essential to consider this risk when making investment decisions.

Another risk to consider is the risk of unstable or unrealized capital appreciation. While the token itself is a utility instrument that doesn’t confer any particular operating risk to the holder, the financial risk is the money invested in the token. The token value can appreciate from the original investment position, but it can also fall, leading to capital depreciation.

For institutional holders of Empowa SDRIs, the risks can be delineated in a more formal and systematic way. Liquidity risk is still the number one risk, but there is also business operations risk associated with the property developer counterparty in-country, political risk on the ground, geographic risk in the form of natural disasters, and capital risk or inflation risks associated with instruments.

However, there are steps that Empowa has taken to mitigate risks, such as securing the cash flows associated with the project, making use of sinking funds, and utilizing the Empowa Pay app to formalize informal payments and to see cash flows very quickly. This gives Empowa the ability to sense when trouble is afoot early, which helps to determine how best to help developers or how best to restructure financial operations to alleviate the greatest risk, which is instrument default risk.

While investing in EMP tokens and Empowa SDRIs can be an attractive opportunity, it’s essential to understand the risks involved. By considering these risks and taking steps to mitigate them, investors can make informed decisions and manage their investments more effectively.

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.


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