Understanding Collateralized Debt Positions (CDPs)
A collateralized debt position (CDP) is a financial position created by locking collateral in MakerDAO’s smart contract to generate its decentralized stablecoin, DAI.
The MakerDAO team introduced this innovative system, serving as the mechanism for creating DAI, a decentralized stablecoin.
The Mechanism of DAI Generation and Repayment
The DAI generated through the CDP represents a decentralized loan backed by the value of the collateral.
To release the locked collateral, a user must repay the generated DAI and stability fees.
It’s important to note that each DAI stablecoin in circulation, which amounts to nearly 500 million at the time of writing, has been created through this process.
Expanding DeFi Horizons
While MakerDAO pioneered the concept of CDPs, it is possible for other decentralized finance (DeFi) projects to adopt CDPs as both a term and a system in the future.