Collateralized debt position in Ethereum

Posición de deuda garantizada

Collateralized debt position (CDP) is an intelligent contract based on the Ethereum blockchain. It is a variation of the financial market derivations created by MakerDAO in 2014.

CDP can simply be defined as a representation of a debt position backed by an underlying set of assets. When referring to security tokens, a PDC represents a debt contract guaranteed by a group of cryptographic securities.

MakerDAO created this technology, which helped develop Dai. Many have described Dai as a solution to the high volatility associated with trading crypto currencies. Being a central component of Dai, CDP helps to support the stablecoin.

CDP allows users to deposit an asset in an intelligent contract as collateral for a loan on the MakerDao platform. After depositing the asset, the CDP retains the assets and allows the user to generate the USD equivalent value in Dai that they wish to borrow. Once granted these tokens, users can make transactions with them like any other crypto currency.

How do you use the collateralized debt position through the PDCs?

A user wishing to use CDP must submit a series of transactions to MakerDAO’s intelligent contracts:

  • The first step would be to create a secured debt position through the MakerDAO system.
  • Once this is complete, the user must deposit assets into the account. MakerDAO only accepts ETH deposits to be used as collateral.
  • Deposited assets are then accepted and held by the CDP. This gives users access to generate or borrow some Dai. It is important to note that, for anyone to make a loan application, the value of the collateral must always be 1.5 times the value of the Dai that one wishes to borrow. As long as we have an outstanding Dai debt, your collateral will remain blocked and unavailable.

In particular, loans from this platform carry interest, if one has access to more funds in the future, they have to repay the amount borrowed in Dai and an interest rate that is also known as the stability rate.

After payment, a user may choose to leave their CDP empty until the next time they wish to borrow more Dai or close it. It is important to remember that borrowing a larger amount could lead to liquidation, mainly due to the high volatility of Ethereum.

What are the benefits of the collateralized debt position?

Like many other technologies, CDP was created to make life easier and safer for people within the cryptographic financial investment space. Technology has many benefits, including:

No credit history requirements

This benefits many people who suffer from bad credit. People who can no longer turn to financial institutions like banks can now obtain funds. When you use the CDP, you eliminate the need for paperwork when you apply for loans in the traditional banking system – all you need is an Ethereum address, and get started!

Flexible in making payments

Unlike traditional lending systems, the CDP does not set time limits, minimum repayment terms, or rates based on shifts.

Low rates

Being based on the Ethereum block chain, there are fewer intermediaries involved and little operational overhead. This reduces the amount charged by the Maker Foundation.

No counterparty risk

Users no longer need to rely on a reliable counterpart institution to manage their funds or release their funds, as it is a decentralized system in a blockchain network. All records are public and secure.

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