What is Collateralized Debt Position or CDP?

Collateralized Debt Position (CDP) is a financial-cryptocurrency concept, which has been developed since 2014 with the whole eco-system of Maker DAO project. Basically, the main purpose of Maker DAO is to minimize the price volatility on cryptocurrency markers through own Maker DAO stable coin (Dai) against the fiat currency. Thanks to this progress, it is now possible to create new functionalities like in traditional financial world but with the difference that everything is decentralized by blockchain technology and smart contracts.

Stability of DAI, Collateralized Debt Position

The usage

Collateralized Debt Position (CDP) allows, that you can lock your crypto assets (now only ETH) into CDP vault and you will get a loan in the amount 66% of DAI (1 DAI = 1 USD) against the deposited amount. If you want to get back access to your locked crypto, you will just simply repay your borrowed debt in Dai.

 Use case Example:

  • Lock up 10 ETH into the CDP vault. In the time of Lockup, the price of ETH is 400 USD, so you Lock up 4 000 USD.
  • Borrow up to 6 ETH worth of Dai, which is 2 420 Dai (2 640 USD)
  • Repay borrowed 2 640 Dai at any time in the future and get your deposit back in ETH. The ideal situation would be if the price of ETH will be higher, for example, 900 USD. So, you would pay 2 640 Dai to repay your debt but you get 10 ETH (price per ETH 900 USD) is worth 9 000 USD.

And this is all magic of CDP – you can to spend money now and still hold your crypto assets.

Collateralized Debt Position

Previw of real CDP from Maker DAO Dashboard – locked up 10 eth, withdrawn 1210 Dai (USD)

*Open CDP ETH price 400 +/- 5 USD, the price of ether at screen time 380 – 390 USD

But what will happen, when the price of ETH will go down?

Every CDP must have Liquidation Ratio over 150% and also it is necessary to watch on “Liquidation price”, which is ETH price, where CDP will be liquidated. If the Liquidation Ratio falls below 150%, CDP it becomes vulnerable and your deposit will be charged by 13% penalty. Exact detail, how this work you find on this Maker DAO Reddit post or on Maker DAO page.

Liquidation price of Collateralized Debt Position

So, the whole idea of CDP is based on that every owner has responsibility for the health of CDP. Basically, you have to watch if your CDP is in good condition and Liquidation Ratio is above 150%. If your ratio of CDP becomes dangerous, you just simply lock up more ETH or repay the debt in Dai.

How to create your own CDP

I very recommend read this Medium article – Maker for Dummies: A Plain English Explanation of the Dai Stablecoin. Personally, I didn’t read a better article that would clearly describe the individual principles of Maker DAO and CDP. It’s great to read the whole concept again from a different point of view.

After you are sure that you clearly understand all the aspects of the CDP, you can continue to official Maker DAO tutorial, how to use Maker Dao CDP Dashboard. Kenny greatly show the complete work with the dashboard (how to open CDP, how to withdraw Dai, how to repay debt or close CDP)

The CDP is a good servant but a bad master

Collateralized Debt Position is for smart people, which who want to increase their cash flow and be more effective. Managing CDP is the responsibility of each investor, who have sufficient resources. In my point of view, it makes sense lock up only 10% of your total ETH.

There is no space for gambling or high risk. It is good to see, that CDP helping people to catch their goals – For example to buy a dream car of repayment of the mortgage. Also, you can look on official Maker DAO dev website, where you can find tips, what can do with CDP.

CDP money