Collateralized Debt Position (CDP)
A DeFi mechanism where a user locks cryptocurrency collateral to borrow a stablecoin against it.
What is CDP?
A collateralized debt position (CDP) is a smart contract-based mechanism used in decentralized finance to generate stablecoins by locking cryptocurrency collateral. The originator of the CDP concept is MakerDAO, which allows users to deposit ETH (and other approved collateral) into a smart contract and borrow DAI, a USD-pegged stablecoin, against that collateral. CDPs are over-collateralized — the value of collateral must exceed the borrowed amount by a set ratio, typically 150% or higher, to protect against price volatility. If the collateral's value falls below the minimum collateralization ratio, the position is automatically liquidated: the smart contract sells enough collateral to repay the debt and cover a liquidation penalty. CDPs enable DeFi users to access liquidity without selling their crypto holdings, at the cost of liquidation risk.
Example
A user deposits 2 ETH worth $6,000 into a MakerDAO Vault and borrows 3,000 DAI (a 200% collateralization ratio). If ETH falls to $2,250, the ratio drops to 150% — the liquidation threshold. The smart contract liquidates the vault: it sells enough ETH to repay the 3,000 DAI debt plus a 13% liquidation penalty. The user loses some ETH but extinguishes the debt.
Source: MakerDAO — DAI Overview