CDP Lifecycle

What a CDP Is

A Collateralized Debt Position (CDP) lets you borrow stablecoins by locking up volatile crypto as collateral. The classic example: deposit $1,000 of ETH into MakerDAO, mint up to ~$650 of DAI (a stablecoin pegged to the dollar), and use that DAI however you like — pay bills, buy more ETH, fund a project. Pay the DAI back any time to unlock your ETH. The collateral exists to guarantee that if you don't pay back, the system can sell your ETH to recover the DAI you minted.

The Three Numbers That Matter

Every CDP has three numbers: **collateral value** (current dollar value of your locked assets), **debt** (DAI minted plus accrued stability fee), and **liquidation ratio** (the minimum allowed collateral-to-debt ratio, e.g., 150% on Maker ETH-A). Your position is safe while collateral / debt stays above the liquidation ratio. When ETH price falls and your ratio drops below 150%, anyone in the world can trigger a liquidation: your collateral gets sold at auction, your debt is repaid from the proceeds, and you keep whatever's left minus a liquidation penalty (typically 13%).

Why People Use CDPs

Three main reasons. **Leverage**: deposit ETH, mint DAI, buy more ETH, deposit, mint more DAI — a loop that lets you control more ETH than you bought outright (and lose more when it drops). **Spending without selling**: tap dollars from your crypto without triggering a taxable event (tax laws vary by jurisdiction; this is not advice). **Yield arbitrage**: borrow DAI at 5% stability fee, deploy it somewhere earning 8%, capture the spread (subject to the leveraged position's risk).

• Lock collateral (ETH, wBTC, LSTs), mint stablecoin debt against it
• Three numbers: collateral value, debt + stability fee, liquidation ratio
• Drop below the ratio and anyone can liquidate you — your collateral is sold at auction
• Used for leverage, dollar liquidity without selling, and yield arbitrage