A collateralized debt position is held by locking collateral in smart contracts to generate stablecoins.
What Is a Collateralized Debt Position (CDP)?
A collateralized debt position (CDP) is the position created by locking collateral in MakerDAO’s smart contract to generate its decentralized stablecoin, DAI.This system was introduced to the decentralized finance world by the MakerDAO team and is how its decentralized stablecoin DAI is created.
The value of the collateral locked in a CDP needs always to exceed 150% of the value of DAI that it was used to generate. If a position becomes undercollateralized, the assets locked in the smart contract get sold to pay back for the DAI generated, a 13% liquidation penalty and the stability fees (currently at 8.5% per year.)The generated DAI is basically a decentralized loan backed by the value of the collateral; in order to unlock the collateral, a user needs to pay back the DAI generated plus the stability fees. Each of the DAI stablecoins in circulation — nearly 440 million at the time of writing — has been created this way.
Traditionally, only Ether could be used to fund MakerDAO’s CDPs, but now BAT, USDC, WBTC, TUSD, KNC, ZRX and MANA are also supported. A decentralized stablecoin backed by Ether-only is still available and is called SAI.
While MakerDAO introduced CDPs, technically other DeFi projects could adopt CDPs both as a term and a system in the future.