Collateralized Debt Position (CDP)
A smart contract mechanism where users lock up cryptocurrency as collateral to borrow or mint stablecoins, requiring over-collateralization to manage risk.
CDPs were pioneered by MakerDAO in 2017 as the mechanism to generate DAI, the first decentralized, crypto-collateralized stablecoin. The architecture avoids the need for a central authority to issue currency by encoding all rules—including collateralization minimums and liquidation triggers—directly into immutable Ethereum smart contracts.
The lifecycle of a CDP is:
1. Open: A user deposits collateral (e.g., 1 ETH worth $3,000) into a Vault smart contract.
2. Borrow: The user mints DAI up to their allowed limit (e.g., $2,000 DAI at a 150% CR).
3. Repay: The user returns the DAI + accrued Stability Fee to close their Vault.
4. Withdraw: The original collateral is returned to the user.
graph LR
Center["Collateralized Debt Position (CDP)"]:::main
Pre_smart_contract["smart-contract"]:::pre --> Center
click Pre_smart_contract "/terms/smart-contract"
Pre_collateral["collateral"]:::pre --> Center
click Pre_collateral "/terms/collateral"
Rel_dns_protocol["dns-protocol"]:::related -.-> Center
click Rel_dns_protocol "/terms/dns-protocol"
Rel_liquidity_pool["liquidity-pool"]:::related -.-> Center
click Rel_liquidity_pool "/terms/liquidity-pool"
Rel_time_lock_contract["time-lock-contract"]:::related -.-> Center
click Rel_time_lock_contract "/terms/time-lock-contract"
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🧠 Knowledge Check
🧒 Explain Like I'm 5
It's like a pawn shop, but run by a robot (a [smart contract](/en/terms/smart-contract)) instead of a person. You bring your gold watch (your [Ethereum](/en/terms/ethereum)), give it to the robot, and the robot gives you some cash ([stablecoins](/en/terms/stablecoins)). You can always get your watch back by giving the cash back plus a small fee. BUT — the robot has one strict rule: your watch must always be worth at least 1.5x the cash it gave you. If gold prices crash and your watch is suddenly only worth the same as the cash, the robot sells your watch automatically to get its money back, no questions asked.
🤓 Expert Deep Dive
Collateralization Ratio (CR) and Liquidation
The CR is the critical health metric for a CDP: CR = (Collateral Value / Debt Value) × 100%. MakerDAO's ETH-A vault has a minimum liquidation ratio of 150%, meaning for every $150 of ETH, you can borrow a maximum of $100 in DAI. If the CR falls below 150%, liquidators (third-party bots) can trigger the liquidation process, purchasing the collateral at a discount. A liquidation penalty (e.g., 13%) is charged to incentivize liquidators and penalize the borrower.
Stability Fee
CDPs charge a variable annual interest rate (the Stability Fee) on the outstanding debt. This fee is paid in MKR (MakerDAO's [governance token](/en/terms/governance-token)) and is burned, creating deflationary pressure on MKR supply.
Economic Purpose
CDPs allow holders of volatile assets (like ETH) to access liquidity without selling their holdings—effectively 'unlocking' the value of their assets. This is a form of leverage: if ETH appreciates, the user profits on both their locked ETH and the stablecoins deployed.
❓ Frequently Asked Questions
What is the difference between a CDP and a Vault?
They are the same thing. 'CDP' (Collateralized Debt Position) was the original term used by MakerDAO when only one collateral type (ETH) was supported. In 2019, MakerDAO rebranded CDPs to 'Vaults' as part of the Multi-Collateral DAI (MCD) upgrade, which allowed many asset types to be used as collateral.
Why do CDPs require over-collateralization?
Because the collateral (like ETH) is volatile in price. If you could borrow $100 by only depositing $100 of ETH, any price drop would instantly make the loan insolvent. By requiring 150% or more, the protocol builds in a safety buffer.
What happens to your collateral when you are liquidated?
Liquidators (bots) buy your collateral at a discount (e.g., 13% cheaper than market price) to pay off your debt. You lose the liquidation penalty but may recover any remaining collateral above what was needed to cover the debt.