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CDP: What is a “collateralized debt position”? (MakerDAO)

CDP: What is a “collateralized debt position”? (MakerDAO)

CDP stands for “collateralized debt position.” In the MakerDAO system, users can create CDPs and lock ether into them as collateral. Doing this permits users to generate Dai up to 2/3 of the value of the locked ether. The generated Dai serves as debt, and CDP owners can do anything they want with it. The collateral remains locked in MakerDAO’s smart contracts until the CDP owner repays the debt (or liquidation occurs).

Owners must maintain a collateral value of at least 1.5 times as much as the total Dai they generate. If the collateral’s value falls below that level, the MakerDAO system automatically liquidates enough collateral to return the ratio of collateral to Dai to 150% (plus a penalty is imposed). Anybody can buy the liquidated collateral at a discount.

CDP Station app for MakerDAO on Settle
CDP Station on Settle

How can I use a CDP?

It’s easy – it’s just a matter of sending a series of transactions to MakerDAO’s smart contracts.

  • First, create a Collateralized Debt Position through the MakerDAO system.
  • Unless you want it to remain empty, the next step is to fund it. Currently, MakerDAO only allows ETH to be used as collateral, but more assets should be available in the future. So you just lock some ETH into MakerDAO’s smart contracts.
  • Once you collateralize your CDP, you can generate (i.e., borrow) some Dai. Remember, your collateral’s value must always remain 1.5 times the value of the Dai you borrow. Because of ETH’s volatility, it’s usually a good idea to borrow less than the maximum amount of Dai so you can avoid liquidation (or anxiety about becoming liquidated).
  • As long as you have outstanding Dai debt, your collateral remains locked and unavailable to you.
  • When you want to retrieve your collateral, you simply pay back the amount of Dai that you borrowed, plus a small stability fee that continuously accrues (the stability fee must be paid with the MKR token; if you don’t hold any MKR, the system automatically buys it for you behind the scenes when you repay borrowed Dai).
  • Finally, once you’ve paid down your Dai debt, you can either close your CDP or just leave it empty and waiting for the next time you want to borrow some Dai.

How can Settle help you?

Settle is an operating system for decentralized finance on Ethereum. It is full of community-built apps that give traders access to a growing number of new tools and protocols. Settle has apps that let you manage and monitor your CDP:

CDP Station app for MakerDAO on Settle

CDP Station lets you create and manage CDPs using minimal gas.

 

Liquid Alert MakerDAO CDP alarm app on SettleLiquid Alert lets you monitor any CDP and get notified when it gets close to liquidation.

 


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