CDP

      CDP is the acronym for Collateralized Debt Position

      A Collateralized Debt Position is simply the technical term used to describe the need to collateralized a loan. CDP was coined by the MakerDAO project as the mechanism which underpins their stablecoin (SAI/DAI). Taking their application of CDP as an example, it works like so:

    Billy wants to obtain some stablecoins and he has some Ethereum. Billy is Bullish on Ethereum’s price and does not want to lose his exposure so he chooses to go mint stablecoins against his ETH. He gets to the portal and decides to mint $10,000 worth of DAI. When he goes to actually mint them, he will be prompted to deposit at least $15,000 worth of Ethereum. The reason of over-collateralizing the loan is a means by which the system manages risk; if the price of the assets that mint DAI fall too far below – then according to mathematics and economic theory – the DAI’s value is no longer true. Now, if Billy ever decides that he wants his ETH back, he will have to unwind his CDP by returning the same amount of DAI he minted + a small stability fee (a few %). If during the time of his assets being locked Ethereum goes up 10x, then the Collateral underpinning the CDP can be used to either mint more DAI or taken out to balance the collateral ratio.