Collateralized Debt Position (CDP)

A Collateralized Debt Position (CDP) is a decentralized finance (DeFi) tool used in platforms like MakerDAO, where users lock up cryptocurrency as collateral to generate a loan in the form of stablecoins, such as DAI. CDPs allow users to leverage their assets without selling them by borrowing stablecoins against the locked collateral. The value of the collateral must exceed the loan value to account for market volatility. If the value of the collateral falls below a certain threshold, the CDP is liquidated to repay the loan, and the user loses their collateral. The key benefit of CDPs is that they enable decentralized borrowing without the need for traditional financial intermediaries. CDPs form the backbone of many DeFi lending platforms, allowing users to access liquidity while retaining exposure to their underlying assets.