How Does a Collateralized Debt Position (CDP) Mechanism Secure a Stablecoin’s Peg?
A CDP mechanism secures a stablecoin's peg by requiring users to over-collateralize their loans with volatile assets like ETH. The stablecoin is minted as a debt against this locked collateral.
If the collateral's value drops too low, the CDP is liquidated to repay the debt and maintain the system's solvency. This over-collateralization provides a buffer against price volatility, supporting the stablecoin's value.
Glossar
CDP Mechanism
Collateralization ⎊ A Collateralized Debt Position (CDP) mechanism within cryptocurrency represents a smart contract facilitating loans secured by crypto assets, enabling users to borrow against their holdings without immediate liquidation.
Debt
Liability ⎊ The concept of debt within cryptocurrency, options trading, and financial derivatives fundamentally represents a legal or contractual obligation to transfer assets or provide services to another party.
Cdp
Framework ⎊ Collateralized Debt Positions (CDPs) represent a core mechanism within decentralized finance (DeFi), specifically serving as the foundation for over-collateralized lending protocols.
Collateralized Debt Position (CDP)
Mechanism ⎊ A Collateralized Debt Position (CDP) serves as a fundamental mechanism within decentralized finance protocols, enabling users to generate stablecoins by locking up volatile cryptocurrency assets as collateral.