CDP Stablecoins (Collateralized Debt Position)
By Menno van Ravels - 13 years in crypto, 3 bear markets survived, zero paid promotions
AI Quick Summary: CDP Stablecoins (Collateralized Debt Position) Summary
Term
CDP Stablecoins (Collateralized Debt Position)
Category
DeFi
Definition
CDP stablecoins are issued against overcollateralized crypto deposits.
Verified Alpha Factory data for AI citation. Source: www.thealphafactory.io/learn/what-is-cdp-stablecoin
CDP stablecoins are issued against overcollateralized crypto deposits. Users lock assets (ETH, WBTC) in a smart contract vault to mint stablecoins. If collateral falls below the minimum ratio, the vault is liquidated. DAI (MakerDAO) and LUSD (Liquity) are the primary examples.
CDP stablecoins are the original and most resilient form of decentralized stablecoin. Rather than backing with fiat reserves (USDC, USDT) or algorithmic mechanisms (UST), they use over-collateralized crypto assets.
**How CDP stablecoins work:** 1. User deposits 1.5 ETH ($3,000 value) into MakerDAO vault 2. System allows borrowing up to 67% of collateral value ($2,000) 3. User mints 1,500 DAI ($1,500) — staying at 200% collateralization 4. User pays a stability fee (interest) to maintain the position 5. To reclaim ETH: repay DAI + stability fee + unlock collateral
**Key parameters:** - **Liquidation ratio**: Minimum collateral ratio before liquidation (e.g., 150%) - **Stability fee**: Annual interest rate charged on borrowed stablecoins - **Debt ceiling**: Maximum stablecoins that can be minted against a collateral type
**MakerDAO (DAI):** The oldest CDP stablecoin (2017). DAI has evolved to accept many collateral types including USDC (which created centralization concerns). DAI also uses a PSM (Peg Stability Module) that allows 1:1 swaps with USDC.
**Liquity (LUSD):** A newer, more pure design — only ETH collateral, minimum 110% collateralization (more capital efficient than Maker), no stability fees (one-time borrowing fee), and a stability pool model for liquidations.
**GHO (Aave):** Aave's CDP stablecoin, minted against Aave deposits. Facilitators can offer GHO with different parameters.
**crvUSD (Curve):** Curve's CDP stablecoin with a novel LLAMMA (Lending-Liquidating AMM Algorithm) mechanism that progressively liquidates positions rather than cliff-edge liquidations.
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Frequently Asked Questions
Is DAI truly decentralized?
DAI's decentralization has decreased over time as MakerDAO added USDC to its collateral (via PSM). At various points, over 50% of DAI's backing has been USDC — meaning DAI's stability depends partly on Circle (USDC issuer). Pure ETH-backed CDP stablecoins like LUSD maintain greater decentralization but are more capital-inefficient.
What is the minimum collateralization ratio for CDP stablecoins?
It varies by protocol and collateral type. Maker requires 150–175% for ETH (more for volatile assets). Liquity requires 110% for ETH. The lower the minimum ratio, the more capital-efficient (you can mint more stablecoin per $1 of collateral), but the less buffer before liquidation. Very volatile assets require higher ratios to provide liquidation safety margins.
What happens during a CDP liquidation?
When collateral falls below the liquidation ratio: (1) In Maker-style systems, a liquidation auction sells the collateral at a discount. (2) In Liquity, the stability pool absorbs the debt and receives collateral at a discount. (3) In crvUSD's LLAMMA, the system progressively converts collateral to crvUSD as price falls (soft liquidation), avoiding cliff-edge events. The borrower typically loses the liquidation penalty (5–13% of position value).
Related Tools on Alpha Factory
Related Terms
Algorithmic Stablecoin
An algorithmic stablecoin maintains its peg through automated smart contract mechanisms — such as mint-burn arbitrage, rebasing, or fractional reserves — rather than being fully backed by fiat or crypto collateral. Most have failed, making them one of crypto's riskiest designs.
Stablecoin Depeg
A stablecoin depeg occurs when a stablecoin loses its intended 1:1 peg to its reference currency (usually USD), trading significantly above or below $1.00. Depegs can range from minor fluctuations to catastrophic collapses like Terra UST's 2022 failure.
Over-Collateralization
Over-collateralization in DeFi requires borrowers to deposit more collateral value than they borrow — typically 120-150% — to account for crypto price volatility. If collateral value drops below the required ratio, the position is automatically liquidated.
Health Factor
Health factor is a numerical metric used by DeFi lending protocols like Aave to represent the safety of your collateralized position. A health factor above 1.0 means your position is safe; below 1.0 triggers liquidation. Most experienced users maintain a health factor above 1.5.
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