Understanding Collateralized Debt Position (CDP)
A Collateralized Debt Position (CDP) is a position created by locking collateral in MakerDAO’s smart contract to generate DAI, a decentralized stablecoin. The MakerDAO team introduced this system to the decentralized finance world, and it is the method through which DAI is created.
In a CDP, the locked collateral must always be worth more than 150% of the generated DAI. If a position becomes undercollateralized, the smart contract sells the locked assets to repay the DAI, along with a 13% liquidation penalty and the current stability fees of 8.5% per year.
The DAI generated through this process is a decentralized loan backed by the collateral’s value. To unlock the collateral, the user must repay the DAI and stability fees. This method has been used to create nearly 440 million DAI stablecoins in circulation.
Initially, only Ether could be used to fund MakerDAO’s CDPs. However, other cryptocurrencies such as BAT, USDC, WBTC, TUSD, KNC, ZRX, and MANA are now supported. It is important to note that there is also a decentralized stablecoin called SAI, which is solely backed by Ether.
While MakerDAO introduced CDPs, other decentralized finance projects may adopt CDPs as both a term and a system in the future.
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