Collateralized Debt Position (CDP)
A DeFi position where a user locks collateral into a smart contract in exchange for newly minted debt, typically a stablecoin, that must later be repaid to reclaim the collateral.
A Collateralized Debt Position (CDP) is a DeFi position where a user locks collateral (typically a volatile crypto asset) into a smart contract in exchange for newly minted debt — typically a stablecoin — that the user must later repay, plus any accrued fee, to reclaim their original collateral.
CDPs are the core mechanism behind several major crypto-collateralized stablecoins, and like any collateralized loan, a CDP becomes subject to liquidation if the collateral's value falls far enough relative to the outstanding debt. See Kaavon's "Collateralization Ratio" glossary definition for how this risk is actually measured.
Examples
- A user might open a CDP by locking ETH as collateral and minting a stablecoin against it, which they must later repay to reclaim their locked ETH.
- A CDP's liquidation risk rises as its collateral's price falls relative to the outstanding minted debt, the same basic dynamic as any collateralized loan.