Collateralized Debt Position(CDP)
A loan where users deposit collateral to mint or borrow assets, with liquidation risk if collateral value falls.
In-Depth Explanation
CDPs are the mechanism behind protocols like MakerDAO and Liquity. Users lock collateral (e.g., ETH) and can borrow against it (e.g., mint DAI). The position must maintain a minimum collateralization ratio or face liquidation. CDPs enable leverage and stablecoin creation without selling underlying assets.
Related Terms
Collateral
Assets deposited as security for a loan, which can be seized if the borrower fails to repay.
Liquidation
Forced closure of an undercollateralized position, typically with a penalty to the borrower.
Health Factor
A metric showing how close a lending position is to liquidation, where below 1 means liquidatable.
Stablecoin
A cryptocurrency designed to maintain a stable value relative to a reference asset, typically the US dollar.
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