Collateralized Debt Position (CDP)

A CDP works by locking assets into a smart contract, which then calculates a collateralization ratio, the value of the deposited collateral divided by the value of the debt drawn against it. As long as that ratio stays above a protocol-defined minimum, the position remains open and the borrower keeps full ownership of the underlying assets, only the ability to move them is restricted until the debt is repaid or the position is closed.

The concept originated with MakerDAO, whose original single-collateral system literally used the term "CDP" before the 2019 Multi-Collateral Dai upgrade renamed individual positions to "Vaults," a term that has stuck in Maker's own interfaces (and its 2026 successor, Sky Protocol) even though the underlying mechanism, and the generic industry term "CDP," remain the same. Users deposit ETH, staked ETH, wrapped Bitcoin, or other approved assets and mint DAI or USDS against them, typically requiring 145 to 175 percent collateral depending on the asset's volatility.

Because crypto prices move quickly, CDPs rely on automated liquidation: if collateral value falls below the required threshold, a liquidator repays the debt and claims the collateral at a discount, protecting the protocol from bad debt. This overcollateralization requirement is the key tradeoff of CDP-based borrowing, it avoids counterparty risk and credit checks but ties up more capital than a traditional loan. Other DeFi protocols beyond Maker/Sky, including Liquity and Abracadabra, use the same core CDP model with different collateral types and target stablecoins.