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What is a CDP and why should I be interested in opening a CDP?

Written by Nikola Jankovic
Updated 4 months ago

CDP stands for Collateralized Debt Position and the MakerDAO CDP is a type of loan administered by a smart contract system that runs on the Ethereum blockchain. The CDP is a core component of the DAI Stablecoin System, which facilitates the creation of DAI against escrowed collateral which is held until the borrowed DAI is returned.

Any user who wishes to borrow DAI may deposit ETH into a CDP. Once escrowed, the user may generate DAI against the value of their deposit. The escrowed ETH may be proportionally withdrawn when the user pays back some or all of the loaned DAI. As long as CDP owners maintain the minimum Collateralization Ratio, they may freely withdraw or deposit surplus collateral.

Note that CDPs are required to be overcollateralized. The value of collateral in a CDP is required to be higher than the amount of debt which guarantees DAI users that their DAI is valuable and fully backed with real assets.

Reasons why you would want to open a CDP include leveraging ETH if you believe it will grow in value, having a flexible line of credit or refinancing other loans.
For a more complete insight into the whole MakerDAO CDP system, we strongly recommend reading their CDP FAQ.

Note: MakerDAO CDPs are also referred to as MakerDAO Vaults.

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