Collateralized Debt Position

Collateralized Debt Position (CDP) is a type of Ethereum-based smart contract powered by blockchain technology. It is a type of financial market instrument introduced and created by MakedDAO in 2014. Collateralized Debt Position (CDP) simply means the debt positions that are backed by a pool of assets based on a crypto asset. Locking the collateral so that DAI, an Ethereum-based stablecoin, can be created at MakerDAO, is accomplished with the Collateralized Debt Position.

What is a Collateralized Debt Position?

This technology, which was found by MakerDAO and is gradually developing, makes the issue of debiting via smart contracts much easier. In essence, the Collateralized Debt Position (CDB) provides the repurchase of stablecoins that are shown as collateral. At the same time, it ensures that the token maintains its value against the US dollar at a constant rate, by not leaving the system and with constant regular feedback. This situation centralizes the borrowing aspect of crypto money technology, which stands out with its decentralized aspect. This should not be perceived as a bad thing either. This makes lending and borrowing transactions safer and much less risky.

How is the Collateralized Debt Position Used?

Any user wishing to use the Collateralized Debt Position (CDP) must submit a collateralized debt agreement through the MakerDAO system. At this point, users frequently communicate with MakerDAO’s smart contracts. Immediately after this transaction takes place, the mentioned asset must be deposited into the said account. MakerDAO currently accepts a limited number of cryptocurrencies as deposits. Of course, developers are also working to increase these deposit currencies in the future.

Some of the supported currencies are ETH, BAT, USDC, WBTC, TUSD, KNC, ZRX, and MANA.

What are the Important Features of Collateralized Debt Position?

A user who take CDP can generate stablecoins by locking their assets with a smart contract. Since the produced stablecoins are protected from volatility due to their nature, making daily transactions with them becomes much more advantageous for the investor. All of the approximately 440 million DAI in circulation today were created by CDP positions of users seeking to hedge against volatility in the world of decentralized finance.

Learn more: Collateralization