What is a Collateralized Debt Position (CDP)?
A Collateralized Debt Position (CDP) is a financial mechanism used in decentralized finance (DeFi) systems, primarily associated with blockchain technology and cryptocurrencies. It allows users to lock up collateral—typically in the form of cryptocurrencies—to mint or borrow a stablecoin or another cryptocurrency.
In a CDP, the value of the collateral must exceed the value of the loan to minimize the risk of liquidation. If the value of the collateral decreases significantly, the CDP may be liquidated to pay off the debt. This liquidation mechanism is crucial to ensure that the system remains solvent and stable.
CDPs are commonly found in platforms like MakerDAO, where users can create a CDP by depositing Ethereum or other digital assets. In return, they can generate DAI, a decentralized stablecoin. This process allows users to gain liquidity while retaining ownership of their collateralized assets.
Moreover, CDPs contribute to the broader DeFi ecosystem by promoting lending, borrowing, and financial innovation. They exemplify how decentralized applications can create complex financial products without intermediaries, leading to a more accessible financial landscape.