Crypto glossary
Collateralized debt position (CDP)
A collateralized debt position (CDP) locks crypto in a smart contract to mint a stablecoin against it, as with DAI, until the debt and fees are repaid.
A collateralized debt position is a vault in which a user deposits collateral, such as ETH, and mints newly created stablecoins against it. Unlike a money market, nobody lends the stablecoin: the protocol creates it when the position opens and destroys it when the debt is repaid. MakerDAO popularised the model with DAI, and Liquity, crvUSD and many other crypto-backed stablecoins use variations of it.
CDPs are how decentralised stablecoins enter circulation. They let holders unlock liquidity without selling, and the combined positions determine the stablecoin's supply. To keep the coin near its peg, the protocol charges a stability fee and requires a minimum collateral ratio, often 150% or more for volatile assets.
If the collateral value drops below the required ratio, the vault is liquidated, usually through an auction or a stability pool, and the owner pays a penalty. Sharp crashes can leave the system undercollateralised, as happened to Maker in March 2020, when network congestion let some liquidations clear at near-zero bids.
Example
A user locks 5 ETH worth 15,000 dollars in a Maker vault and mints 6,000 DAI; to recover the ether later, she must repay the 6,000 DAI plus the accrued stability fee.