I don’t know the ins and outs of Populous or how the financing for the Populous platform is put together but from the tidbits I am learning and my own research I am fairly confident to say that it is safe to invest on the Populous Invoice Factoring Platform.
How are PPTs used on Populous
The way that PPTs are used on the Platform is not as an entry fee into the platform as other tokens are deemed but to be used as collateral secured against the loans you make on the Populous Platform. As I have tried to explain in my previous post, the market value of PPT determines the amount you can invest on the Platform.
For example, if 1 PPT is value at $50 then your allowable investment could be 1 PPT x $50 x 0.8 (Discount Factor) = $40 (Investment Amount). So if you had 1000 PPT, then you can buy invoices to the value of 1000 PPT x $40 = $40,000. See my post “Populous – A Plate of PPT and Plenty of Secret Sauce” where I explain how this is applied.
How Does Populous Protect Investors from Loan Default
As an investor you would be concerned whether the principal amount is returned together with interest from your investment. How does Populous ensure that its investors are protected from loan default? Populous is not the first of its kind in Invoice Factoring or even in the “loan” business so there are ways to protect the investors. Why expose yourself to un-necessary risks when you can mitigate them!
To date I am aware of two method that Populous will/might use. These are:
- The purchase of Business & Trade Insurance
- The use of Property Liens
These are the two ways that I am able to learn from Populous and there may be more but I am not aware of them at this time. From what I can see, these would assume to be sufficient if not the main ways of protect its investors from default.
The credit insurance protects against the failure of your borrowers to pay the invoice on the due date that is owed to you. The borrower becomes insolvent or just fail to pay within the agreed terms and conditions. If the borrower cannot or will not pay you, you will be insured and indemnified up to the limit of your policy.
Along with the necessary insurance Populous may also employ an agency to follow-up and collect any debt on its behalf. After all, you must show that you are doing your best to collect any debt outstanding before the insurance payout kick in to indemnify you.
When you take on a loan and sign on the dotted line, you are basically promising to repay that debt. Depending on the amount being borrowed, the creditors may require some collateral to minimise their financial risk when they make you the loan. As a way to assuage the concerns of your creditor you may give the creditor the rights to your property in the event of a default. Thus the creditor lends you the money on the understand that you will forfeit your property in the case if default. This agreement is referred to as a property lien.
At this time, I cannot see Populous becoming a landlord nor do I expect they want to especially of a company that was unable to pay back its loan. Why take over a failing company. If the worst come to the worse, then I see Populous taking over the properties and immediately sell it off on the market to recuperate the borrowed amount.
There are other ways to assess the default risk of borrowers that can be used to further minimise the default risk of the potential borrowers. I will try to cover that in a different post which Populous will be using to its advantage.
What Are My Risks?
Since PPTs are used as collateral on the Populous Platform, there must be risks involved? What are the risks when PPT goes up in value and especially when PPT goes downs?
When PPT goes up in value your investment will still be of value because your collateral is still sufficient to offset your investment should there be a default. So in this case your risks are minimal.
It’s a different story when the value of PPT goes down. I have assumed that your PPT will not be taken as full face value but as a discounted value to allow for fluctuation in price. My guess of 80% is just a wild ass guess but I am assuming that there will be an oracle built in to monitor the volatility of the PPT price that would determine the rate of exchange so hopefully your collateral will always be above water.
If your collateral value fall below the value if your investment then the risk is that you will need to top up or liquidate your investment immediately. This is what you would expect when making any investment!
For Populous I have a different view on this. This all boils down to the fact that there is no credit line and credit is provided by a collective liquidity pool. What this means is that Populous is 100% funded irrespective of the PPT price. I alluded to this in my post “Populous – Using Someone Else’s Money to Make Money”. PPT holders do not provide liquidity on Populous (okay, maybe a tiny tiny bit) nor does the value of the PPT price on the market affect liquidity.
The downside risks are small for PPT holders (obviously depending on the size of you initial investment when purchasing PPT) and to Populous should the price collapse to $0 on the market. The business will survive irrespective of the price of PPT.
Will you therefore need to top up your investment if the PPT price falls to $0. I would say “No” (my guess). Populous would just return your PPT after the investment period is over and you just have collateral that has zero value. There appears to be little to no risks when investing on the Populous Platform. Again, I’m only guessing because I don’t know Populous’ policy on this.
Populous/PPT is very interesting and the more I study it the more I am intrigued by it.
This is NOT Financial Advice
In my humble opinion, the risks to the downside are small compared to the potential upside rewards. This should not be construed as financial advice but an opinion only. As usual do not invest more than you can afford to lose as these investments can go to zero and always do your own due diligence.