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Crypto Terms:  Letter C

What is Collateralized Debt Position (CDP)?

Meaning:
Collateralized Debt Position (CDP) - a position that is created when collateral is locked into a MakerDAO’s smart contract. It generates the decentralized stablecoin DAI.
easy
1 minute

Let's find out Collateralized Debt Position (CDP) meaning, definition in crypto, what is Collateralized Debt Position (CDP), and all other detailed facts.

A collateralized debt position (CDP) is created when collateral is locked into MakerDAO’s smart contract and the decentralized stablecoin DAI is generated. The value of the collateral placed in the collateralized debt position must exceed 150% of the generated DAI value.

In case a position becomes undercollateralized, the assets in the smart contract are sold. The funds are used to pay back the generated DAI, a 13% liquidation penalty, and the stability fees applicable at the time of payment.

DAI acts as a decentralized loan. It is backed by the collateral’s value. If the user wishes to unlock the collateral, they must pay back the generated DAI, as well as additional stability fees. As of February 2022, there are 10 billion DAI stablecoins in circulation.

DAI is an Ethereum-based ERC-20-compatible token. When MakerDAO first launched CDPs, they could only be backed using Ether (ETH). However, CDP now also supports other cryptocurrencies, like USDC, MANA, and ZRX, to name a few. SAI is a decentralized stablecoin backed solely by Ether.

With the growing prominence of CDPs in crypto loans, it is possible that this technology will be adopted by other decentralized finance (DeFi) projects.

liquidity. It is a mortgage-backed security measure. In turn, investors get collateralized loan packages as well as all future loan repayments.<\/p>\n<p>CMOs are considered to be versatile investments. However, they are considered risky for the purchasers. Since they are made up of several different mortgages, there is a high chance that one of them may be <strong>defaulted<\/strong>, meaning that the borrower failed to return the entire loan. For this reason, CMOs are seen as some of the riskiest financial investments.<\/p>\n<p>A CMO provides an investor with significant collateral value. This means that if an investor owns a CMO containing seven mortgage loans taken out by different customers, they will either receive repayments of all loans or claim ownership of the collateral from the defaulted loans. Thus, CMOs are seen as a viable strategy for diversifying investment portfolios.<\/p>\n<p>CMOs were prominent prior to the <strong>2008 global financial crisis<\/strong>. The primary cause of the financial crash in the US and the rest of the world was an influx of <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-collateralized-debt-obligation/">collateralized debt obligations (CDOs)<\/strong><\/a> being defaulted. CDOs function similarly to CMOs; however, they also allow banks to bundle up other credits alongside mortgage loans.<\/p>\n<p>Since it was becoming increasingly difficult for borrowers to pay their monthly loan installments, many loans in the CDOs were defaulting. This led to a housing market crash and a sudden fall of property value. Many borrowers lost the property they took the loans for, while institutional investors saw massive financial losses.<\/p>\n<p>After the financial crisis, stricter regulations were put in place to manage CDOs and CMOs. Despite the consequences of the 2008 crisis, CMOs have remained a lucrative investment opportunity. Thanks to regulatory improvements and stricter bank regulations, the housing market has corrected its course and CMOs have started to regain their value.<\/p>","definition":"a package of mortgage bundles sold to investors.","status":"published","meta_title":"What is Collateralized Mortgage Obligation (CMO)? Definition & Meaning | Crypto Wiki","meta_description":"Collateralized Mortgage Obligation (CMO) meaning: Collateralized Mortgage Obligation (CMO) - a package of mortgage bundles sold to investors.","meta_keywords":null}" :prev-section="{"id":188,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Collateralized_Debt_Obligation","level":"medium","author_id":1,"created_at":"2023-06-19T06:58:59.000000Z","updated_at":"2023-12-27T15:41:58.000000Z","slug":"what-is-collateralized-debt-obligation","title":"What is Collateralized Debt Obligation?","section":"C","keyword":"Collateralized Debt Obligation","content":"<p><strong>A collateralized debt obligation is<\/strong>&nbsp;marketed to investment firms.<\/p>\n<p>Drexel Burnham Lambert, a former investment organization, first presented CDOs on the US financial scene in 1987. However, it did not garner as much attention until 2008. Collateralized debt obligations (CDOs) picked up steam, with sales nearly doubling from $30 billion in 2003 to $225 billion in 2006.<\/p>\n<p>In other words, it is a mixture of several other, smaller loans which are<strong> repacked based on the level of credit risk,<\/strong> and suggested for institutional investors. The smaller loans can be anything from student loans, and mortgages, to bonds.<\/p>\n<p>The time frame between 2003 and 2008 was when the majority of CDOs that were sold were comprised of mortgage-supported securities, which was way riskier. Therefore, many CDOs began to significantly lose their worth when more and more people were forfeiting their mortgages.<\/p>\n<p>When the housing market collapsed in the United States, CDOs surrendered their place as one of the most favored derivative investment choices. Nonetheless, banks continue to employ them on a somewhat lesser level to produce liquidity relatively quickly.<\/p>\n<p>To be fair, the main focus of CDOs is to mix a specific amount of loans into a bigger asset. The asset is resold to a bigger investment company at the end. In this case, individuals or organizations who originally surrendered the loans will get a lump sum of money. The new investor, on the other hand, will gain the loans and the collateral among them.<\/p>\n<p>Properties, cars, and commodities can be a form of collateral that is given to a lender so the borrower could take out a loan. The collateral in the context of collateralized debt obligations is frequently a vehicle or a piece of real estate. Banks generally manufacture CDOs, which are subsequently sold to institutional investors.<\/p>\n<p>In a scenario where banks choose a composition of loans and assets for CDOs, they are searching for ways to develop a balanced ratio between risk and reward.<\/p>\n<p>A CDO can be made up of a wide range of assets. For instance, mortgage-backed securities are made up of mortgage loans. Asset-backed securities, on the other hand, are made up of business and private debt, credit card debt, and auto leases and loans.&nbsp;<\/p>\n<p>Any of these loans and financial obligations can be included in a CDO.<\/p>\n<p>Considering their part in the financial crisis, collateralized debt obligations are still a popular investment option in structured finance. <strong>CDOs are still in use because they are fundamentally a mechanism for moving risk and freeing up capital.<\/strong><\/p>","definition":"(CDO) is a complex financing mechanism supported by a pool of loans and other assets.","status":"published","meta_title":"What is Collateralized Debt Obligation? Definition & Meaning | Crypto Wiki","meta_description":"Collateralized Debt Obligation meaning: Collateralized Debt Obligation - (CDO) is a complex financing mechanism supported by a pool of loans and other assets.","meta_keywords":null}" :model="{"id":180,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Collateralized_debt_obligation","level":"easy","author_id":1,"created_at":"2023-06-19T06:58:59.000000Z","updated_at":"2023-12-27T15:43:38.000000Z","slug":"what-is-collateralized-debt-position-cdp","title":"What is Collateralized Debt Position (CDP)?","section":"C","keyword":"Collateralized Debt Position (CDP)","content":"<p>A <strong>collateralized debt position (CDP)<\/strong> is created when <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-collateral/">collateral is locked into MakerDAO&rsquo;s <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-smart-contract/">smart contract<\/strong><\/a> and the <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-decentralized-stablecoin/">decentralized stablecoin<\/strong><\/a> DAI is generated. The value of the collateral placed in the collateralized debt position must exceed 150% of the generated DAI value.<\/p>\n<p>In case a position becomes undercollateralized, the assets in the smart contract are sold. The funds are used to pay back the generated DAI, a 13% liquidation penalty, and the stability fees applicable at the time of payment.<\/p>\n<p>DAI acts as a <strong>decentralized loan<\/strong>. It is backed by the collateral&rsquo;s value. If the user wishes to unlock the collateral, they must pay back the generated DAI, as well as additional stability fees. As of February 2022, there are 10 billion DAI <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-stablecoin/">stablecoins in circulation.<\/p>\n<p>DAI is an Ethereum-based ERC-20-compatible token. When MakerDAO first launched CDPs, they could only be backed using <a href=https://www.bitdegree.org/"https:////www.bitdegree.org//crypto//buy-ethereum-eth/">Ether (ETH)<\/strong><\/a>. However, CDP now also supports other cryptocurrencies, like USDC, MANA, and ZRX, to name a few. <strong>SAI<\/strong> is a decentralized stablecoin backed solely by Ether.<\/p>\n<p>With the growing prominence of CDPs in crypto loans, it is possible that this technology will be adopted by other <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-defi/">decentralized finance (DeFi)<\/strong><\/a> projects.<\/p>","definition":"a position that is created when collateral is locked into a MakerDAO\u2019s smart contract. It generates the decentralized stablecoin DAI.","status":"published","meta_title":"What is Collateralized Debt Position (CDP)? Definition & Meaning | Crypto Wiki","meta_description":"Collateralized Debt Position (CDP) meaning: Collateralized Debt Position (CDP) - a position that is created when collateral is locked into a MakerDAO\u2019s smart contract. It generates the decentralized stablecoin DAI.","meta_keywords":null,"author":{"id":1,"user_id":1,"created_at":"2023-05-03T14:30:55.000000Z","updated_at":"2023-05-11T07:18:20.000000Z","title":"Editor-In-Chief","slug":"aaron-s-editor-in-chief","description":"<p>Having completed a Master&rsquo;s degree on Economics, Politics &amp; Culture for the East Asia region, Aaron has written scientific papers with a comparative analysis of the differences between US&rsquo; Western and Japan&rsquo;s Collective forms of capitalism, 1945-2020.<\/p>\n<p>With close to a decade of experience in the FinTech industry, Aaron understands all of the biggest issues and struggles that crypto enthusiasts face. He&rsquo;s a passionate analyst who is concerned with data-driven and fact-based content, as well as that which speaks to both Web3 natives and industry newcomers.<\/p>\n<p>Aaron is the go-to person for everything and anything related to digital currencies. With a huge passion for blockchain &amp; Web3 education, Aaron strives to transform the space as we know it, and make it more approachable to complete beginners.<\/p>\n<p>Aaron has been quoted by multiple established outlets, and is a published author himself. Even during his free time, he enjoys researching the market trends, and looking for the next supernova.<\/p>","user":{"id":1,"first_name":"Aaron","last_name":"S.","email":"aaron@bitdegree.org","email_sanitized":"aaron@bitdegree.org","email_verified_at":"2023-12-01T09:40:20.000000Z","must_verify_email":false,"is_registered_with_wallet":false,"status":"active","country":"LT","last_connected_ip":"88.119.132.125","image_id":2641,"referral_token":"05TMu2NysXOCn525","referred_by":null,"created_at":"2023-05-03T14:30:55.000000Z","updated_at":"2024-01-09T15:22:21.000000Z","full_name":"Aaron S."}}}" :chapter-list="[{"id":1,"title":"Blockchain","slug":"blockchain","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-blockchain.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/blockchain-101.jpg","rating":100,"sections":[{"chapter_id":1,"order":1,"slug":"what-is-blockchain","title":"What is the Blockchain?","status":"published","modified_content":null},{"chapter_id":1,"order":2,"slug":"decentralized-blockchain","title":"Anonymous & Decentralized Blockchains: The Cornerstone of Crypto","status":"published","modified_content":null},{"chapter_id":1,"order":3,"slug":"blockchain-transaction","title":"What is a Blockchain Transaction in Crypto?","status":"published","modified_content":null},{"chapter_id":1,"order":4,"slug":"crypto-fees","title":"The Different Types of Crypto Fees Explained","status":"published","modified_content":null},{"chapter_id":1,"order":5,"slug":"what-is-bridging-in-crypto","title":"The Key Notion Behind the Concept of Bridging in Crypto","status":"published","modified_content":null},{"chapter_id":1,"order":6,"slug":"types-of-blockchains","title":"Different Types of Blockchains: What to Look Out For?","status":"published","modified_content":null}]},{"id":2,"title":"Cryptocurrencies","slug":"cryptocurrencies","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-cryptocurrencies.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/cryptocurrencies-101.jpg","rating":100,"sections":[{"chapter_id":2,"order":1,"slug":"what-is-a-cryptocurrency","title":"What is a Cryptocurrency?","status":"published","modified_content":null},{"chapter_id":2,"order":2,"slug":"how-does-cryptocurrency-work","title":"How Does Cryptocurrency Work?","status":"published","modified_content":null},{"chapter_id":2,"order":3,"slug":"is-cryptocurrency-a-good-investment","title":"Is Cryptocurrency a Good Investment? 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Wallet?","status":"published","modified_content":null},{"chapter_id":4,"order":2,"slug":"hot-wallet-vs-cold-wallet","title":"Hot Wallet VS Cold Wallet: Which One to Pick?","status":"published","modified_content":null},{"chapter_id":4,"order":3,"slug":"non-custodial-wallet","title":"What are Non-Custodial Crypto Wallets?","status":"published","modified_content":null},{"chapter_id":4,"order":4,"slug":"what-is-metamask","title":"Metamask: The Leading Non-Custodial Wallet","status":"published","modified_content":null},{"chapter_id":4,"order":37,"slug":"how-safe-is-cryptocurrency","title":"The Key Crypto Wallet Safety Practices: How Safe Can Crypto Be?","status":"published","modified_content":null}]},{"id":5,"title":"NFTs","slug":"nfts","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-nfts.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/nfts-101.jpg","rating":100,"sections":[{"chapter_id":5,"order":2,"slug":"how-to-trade-nfts","title":"NFT Trading: The Ins and Outs","status":"published","modified_content":null},{"chapter_id":5,"order":3,"slug":"buying-nft","title":"Tips and Tricks of Choosing the Right NFTs","status":"published","modified_content":null},{"chapter_id":5,"order":4,"slug":"how-to-store-nft","title":"How to Store NFTs: Best Practices","status":"published","modified_content":null},{"chapter_id":5,"order":5,"slug":"how-to-create-an-nft","title":"How to Create Your Own NFTs?","status":"published","modified_content":null},{"chapter_id":5,"order":6,"slug":"how-to-make-passive-money-with-nft","title":"Making Passive Money with NFTs","status":"published","modified_content":null}]},{"id":6,"title":"dApps & Defi","slug":"dapps-and-defi","updated":true,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-dapps.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/dapps-defi-101.jpg","rating":80,"sections":[{"chapter_id":6,"order":1,"slug":"what-are-nfts","title":"What are Non-Fungible Tokens 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Cryptocurrencies?","status":"published","modified_content":null},{"chapter_id":7,"order":2,"slug":"how-to-invest-in-crypto","title":"Investing in Crypto: What Investing Options Do You Have?","status":"published","modified_content":null},{"chapter_id":7,"order":3,"slug":"ico-vs-ido","title":"ICO vs IDO vs IEO: Which One is the One?","status":"published","modified_content":null},{"chapter_id":7,"order":4,"slug":"what-is-an-airdrop","title":"What are Crypto Airdrops and How to Get Them?","status":"published","modified_content":null},{"chapter_id":7,"order":5,"slug":"how-to-get-free-crypto","title":"How to Get Free Crypto Assets?","status":"published","modified_content":null},{"chapter_id":7,"order":6,"slug":"how-to-arbitrage-crypto","title":"What is Crypto Arbitrage: The Main Principles","status":"published","modified_content":null},{"chapter_id":7,"order":7,"slug":"what-is-a-perpetual-contract","title":"Perpetual Contracts: Futures Contracts Without an Expiration Date","status":"published","modified_content":null},{"chapter_id":7,"order":8,"slug":"what-is-fud","title":"What is FUD: How to Use It to Your Advantage While Investing in Crypto?","status":"published","modified_content":null},{"chapter_id":7,"order":9,"slug":"investing-in-cryptocurrency","title":"Investing in Cryptocurrency: How to Manage Your Risks?","status":"published","modified_content":null},{"chapter_id":7,"order":10,"slug":"what-is-a-rug-pull-in-crypto","title":"What is a Rug Pull in Crypto?","status":"published","modified_content":null},{"chapter_id":7,"order":11,"slug":"how-to-avoid-rug-pulls-in-crypto","title":"How to Spot and Avoid Rug Pulls?","status":"published","modified_content":null},{"chapter_id":7,"order":12,"slug":"how-to-avoid-crypto-taxes","title":"The Key Legal Techniques of Avoiding Crypto Taxes","status":"published","modified_content":null}]},{"id":8,"title":"Crypto 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Mining?","status":"published","modified_content":null},{"chapter_id":9,"order":3,"slug":"what-is-staking-crypto","title":"An Advanced Look into What is Staking Crypto","status":"published","modified_content":null},{"chapter_id":9,"order":4,"slug":"what-is-proof-of-stake-vs-proof-of-work","title":"Proof-of-Work VS Proof-of-Stake: The Differences That Matter","status":"published","modified_content":null},{"chapter_id":9,"order":5,"slug":"what-is-crypto-mining-rig","title":"Crypto Mining Rig: What It is and How to Build One?","status":"published","modified_content":null}]},{"id":10,"title":"Crypto Terms","updated":false,"chapter":"crypto\/assets\/crypto-book\/chapters\/crypto-101-glossary.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/crypto-glossary-101.jpg","rating":100,"sections":["A","B","C","D","E","F","G","H","I","J","K","L","M","N","O","P","Q","R","S","T","U","V","W","X","Y","Z"]}]" current-chapter="C" current-section="what-is-collateralized-debt-position-cdp">