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How Does a Collateralized Debt Position (CDP) Mechanism Secure a Stablecoin’s Peg?

Over-collateralization with volatile assets and liquidation mechanisms maintain the stablecoin's solvency and price stability.
Greeks.Live21.11.25

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.

What Is the Concept of a Collateralized Debt Position (CDP) in DeFi?
How Does a Decentralized Stablecoin Maintain Its Price Peg without a Central Bank?
What Is the Significance of “Collateralization” in Decentralized Finance (DeFi)?
How Does Liquidation Occur in a CDP and What Is Its Purpose?

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