Collateralized Debt Position (CDP)
A smart contract where a user locks collateral to generate a loan (typically a stablecoin like DAI). CDPs were pioneered by MakerDAO and form the basis of decentralized stablecoin issuance.
You deposit crypto, you borrow against it, and a smart contract holds everything together — no bank, no loan officer, no credit check. That's a CDP in one sentence. The contract locks your collateral and mints a loan, usually a stablecoin like DAI, directly to your wallet.
CDPs matter because they're the engine behind decentralized stablecoins. When you borrow DAI from Sky (formerly MakerDAO), you're not borrowing from a lending pool — you're creating new DAI, backed by your locked collateral. Repay the loan, the DAI is burned, your collateral is released.
How It Works
Say you deposit 1 ETH worth $3,000. The protocol might allow a maximum loan-to-value (LTV) of 66%, so you can borrow up to $2,000 in DAI. You keep your ETH exposure and get liquid dollars — without selling.
The CDP stays open as long as your collateral covers the debt by a required margin. If ETH drops and your collateral ratio falls below the liquidation threshold — say 150% — the protocol automatically sells enough collateral to cover the loan. No warning, no grace period.
You also pay a stability fee, which is essentially the interest rate on your borrowed stablecoin. It accrues continuously and gets added to your debt. Ignore it long enough and your effective LTV creeps up even if the price holds steady.
Why It Matters
CDPs let crypto holders access liquidity without a taxable sale. For someone holding appreciated ETH, borrowing against it is often more capital-efficient than selling — you stay in the position and get cash to deploy elsewhere.
What is Wallet?
Software or hardware that stores your private keys and allows you to interact with blockchains. To use DeFi lending, you need a non-custodial wallet like MetaMask, Ledger, or Coinbase Wallet.
Full glossary entryThey also underpin the entire decentralized stablecoin model. DAI isn't backed by dollars in a bank account — it's backed by overcollateralized crypto positions held in smart contracts. The stability of the stablecoin depends entirely on the health of the CDPs behind it.
Bill's Take
In 25 years of mortgage lending, the closest thing I've seen to a CDP is a home equity line of credit — you pledge an asset, borrow against it, and the lender has a claim if you default. The difference is profound, though. A HELOC takes months to originate, has a human underwriter, and your bank calls before foreclosing. A CDP liquidates in seconds, the smart contract doesn't negotiate, and there's no loan modification department. The efficiency cuts both ways.
What to Watch
The most common mistake is treating your initial LTV as your permanent safe zone. Crypto prices move fast. A position that looks comfortable at 50% LTV can breach the liquidation threshold in a single bad hour during a volatile market. Buffer matters more than rate.
What is Liquidation Threshold?
The LTV ratio at which a lending protocol will begin liquidating a borrower's collateral. For example, if the liquidation threshold is 80%, your collateral will be sold if your debt reaches 80% of its value.
Full glossary entryLiquidation Penalty
Liquidation in a CDP isn't just closing your position — it often comes with a liquidation penalty on top. You lose a chunk of your collateral as a fee to the liquidator. Borrow conservatively or monitor your position actively. There is no middle ground.
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