A Collateralized Debt Position (CDP) is a smart contract-based loan facility where users deposit crypto assets as collateral and receive a minted stablecoin or borrowed asset in return, governed by a collateralization ratio enforced on-chain. CDPs are the foundational mechanism behind DAI and many other decentralized stablecoins.
How CDPs Work
- Open a vault — A user interacts with a CDP protocol (e.g., MakerDAO) and selects a collateral asset.
- Deposit collateral — The user locks ETH, WBTC, stablecoins, or other approved assets into the vault smart contract.
- Generate stablecoin — The user mints (borrows) the protocol’s stablecoin (e.g., DAI) up to the permitted amount based on the collateral’s value and the vault’s loan-to-value ratio.
- Use freely — The minted stablecoin is real — it can be used in DeFi, converted to cash, or reinvested.
- Repay to reclaim — To recover collateral, the user repays the minted stablecoin plus a stability fee (interest). The repaid stablecoin is burned.
Collateralization Ratios
CDPs require overcollateralization — you must lock more value than you borrow:
| Parameter | Meaning | Example |
|---|---|---|
| Collateralization Ratio | Collateral value / debt value | 200% = $200 ETH for $100 DAI |
| Minimum Ratio (Liquidation Threshold) | Below this triggers liquidation | 150% for ETH vaults |
| Liquidation Penalty | Fee applied at liquidation | 13% in MakerDAO |
If your collateral’s value falls and your ratio breaches the minimum threshold, your vault is liquidated: the protocol seizes and auctions your collateral to repay the debt.
Why CDPs Instead of Just Borrowing?
CDPs specifically create new stablecoin supply rather than borrowing existing tokens from a pool:
- MakerDAO vault → DAI is minted when opened; burned when closed. DAI supply is entirely backed by CDP collateral.
- Aave / Compound → You borrow tokens that other users deposited. Supply is fixed by deposits.
This distinction makes CDP-based stablecoins endogenous to the protocol — their supply expands and contracts with demand. Lending protocols are exogenous — supply is limited by what depositors provide.
CDP-Based Protocols
| Protocol | Stablecoin | Notable Feature |
|---|---|---|
| MakerDAO | DAI | Pioneer; multi-collateral; governance via MKR |
| Liquity | LUSD | 0% interest; algorithmic stability; ETH only |
| Liquity V2 | BOLD | User-set interest rates; multiple collateral types |
| Raft | R | ETH LST collateral; ultra-low fees |
| Gravita | GRAI | Multi-LST collateral; Liquity fork |
| PRISMA | mkUSD | CurveLP + LST collateral; CRV/CVX ecosystem integration |
Risks
Liquidation Risk
MakerDAO’s Black Thursday (March 2022)
Stability Fee (Interest)
History
- 2014 — Rune Christensen begins developing MakerDAO, conceptualizing on-chain CDPs.
- 2017 — Single-Collateral DAI (SAI) launches — ETH-only CDPs backed by the Maker protocol.
- 2019 — Multi-Collateral DAI — CDPs renamed “Vaults” and opened to multiple collateral types.
- March 2020 — Black Thursday — ETH crashes, liquidation system fails. MakerDAO emergency governance.
- 2021 — Liquity launches with zero-interest CDPs using pure algorithmic stability, demonstrating CDP design without governance.
- 2022–2024 — CDP proliferation — Dozens of protocols build on Liquity’s model for LST collateral during the liquid staking boom.
Common Misconceptions
“A CDP is just a loan.”
CDPs create new stablecoin supply — they don’t borrow from depositors. The minted token must be burned upon repayment; it’s destroyed from circulation.
“You can borrow more than your collateral is worth.”
No. CDPs are always overcollateralized by design. Undercollateralized (unsecured) CDP lending doesn’t exist in trust-minimized DeFi, though protocol tweaks like credit delegation exist for known counterparties.
“All stablecoins are made via CDPs.”
Fiat-backed stablecoins (USDC, USDT) are backed by real-world assets held by companies. Only overcollateralized, decentralized stablecoins (DAI, LUSD) use the CDP model.