Collateralized Debt Position (CDP)
The age of blockchain technology allowed developers to produce various financial instruments that were once reserved only for the wealthy. Now almost anyone with a laptop or mobile phone can readily access any accommodating platform to start rolling their funds into something worthy and profitable.
Once such a platform that designed one of today’s more popular DeFi products is MakerDAO, which produced a CDP, or collateralized debt position. The CDP requires users’ crypto assets to be locked up as collateral to create DAI, an ERC-20 stablecoin whose flexibility allows for purchasing added crypto or trading for fiat.
Borrowers can then generate 2/3 of their collateral value which will reflect debt in the borrower’s CDP account. To recoup the collateral, the borrower can repay the debt fully or via a pro-rata basis. The CDP will be liquidated if the debt is not paid, and any excess amount will be returned with a small liquidation fee.
A stability fee that comes as interest is included in the debt. As the amount is borrowed in DAI, the stability fee is paid in MKR (Maker). In case the borrower has no MKR token, the system is automated to buy it to complete the debt.
Mint and Burn
The CDP may be left empty until the next round of borrowing or closed down. To function properly, CDP is allowed to create new DAI for lending purposes. But once the debt is paid, the DAI is destroyed. The minting and burning cycle maintain the total supply of the stablecoin to preserve its value.
This credit instrument is highly favoured by many mainly due to the following advantages:
Submission of credit history is not required. Thus, benefitting individuals who cannot avail of funds because of bad credit. They can again get hold of much-needed finances without the tiring paperwork trail. Only an Ethereum address is what is needed, and everything else follows.
Flexible payment schemes. CDP does not demand duration, repayment schedules, or shift term-based rates. Users can freely choose to deposit or draw DAI as additional collateral.
Surprisingly low fees. As decentralized as it can be, the absence of third-party mediations makes the processing fee kept to a minimum low without burdensome overheads reflective of legacy financial institutions.
No risk of counterparty involvement. As has been mentioned, the decentralized borrowing platform is in no way reliant on intermediaries, and the distributed ledger renders all records public, immutable and secured.
What to do with DAI.you can do
Once you get hold of DAI, there are a variety of things with it aside from trading it for fiat. You can use DAI to buy more cryptocurrencies, earn interest by saving or lending, or you can utilize it as a currency just like any other stablecoin.
Fintech and DeFi are meant to disrupt obsolete financial systems that have long been the cause of limited access to wealth and funds. By means of new credit instruments, an overflowing measure of opportunities is now open to give more lives a better chance of enjoying a higher standard of living. Thanks to blockchain and cryptocurrency technologies.
eQapital is relevant now more than ever in catering to the present needs of the digital investor. Financial services from Trust, Custody, Exchange, Transfer, to Asset Management needs are strategized on blockchain to empower you to control your funds, whether fiat or crypto. Security is in place with AML/KYC/CFT procedures. Our friendly eQapital Team is always ready to assist you 24/7. Give us a call now and be partners towards your progressive financial health goals.