What is a CDP (collateralised debt position)?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
A CDP is a position in which you lock crypto as collateral and a contract mints a new stablecoin against it. Unlike lending, nothing is borrowed from another user — the supply is created. Repay and the minted units are destroyed and the collateral is released; fall below the threshold and it is liquidated.
Key points
- Lock collateral, mint new stablecoin against it
- Supply is created by the contract, not borrowed from a lender
- Repaying burns the minted units and unlocks the collateral
- Falling below the threshold means liquidation plus a penalty
Definition
A smart contract position where crypto is locked as collateral and a stablecoin is minted against it up to a permitted fraction of its value; repayment burns the minted stablecoin and releases the collateral.
The canonical CDP locks ETH and mints a dollar-pegged stablecoin against it. The user locks collateral and receives newly minted units up to the allowed fraction. Those units were not taken from any depositor; the contract created them, and repayment burns them out of existence again.
That is the difference from lending. A lending market has depositors whose capital you borrow, and interest flows to them. A CDP has no lender, so the stability fee accrues to the protocol instead, funding things like covering bad debt left by failed liquidations or buying back the governance token, depending on the design.
For a user, the point is raising spendable funds without giving up the collateral asset: keep the ETH exposure, take the stablecoin, use it elsewhere. But if ETH falls, the position is liquidated and only what remains after the penalty comes back. If the minted stablecoin has already been spent, there may be nothing available to repay with when that moment arrives.
Watch out for
- · If the minted stablecoin has been spent, you cannot repay to defend the position when collateral falls
- · Stability fees accumulate, so long-forgotten positions carry the heaviest debt
- · The stablecoin itself can lose its peg, and collateral crashes are exactly when that is most likely