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. 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Pulls?","featured_image_id":6555,"status":"published","chapter_id":7,"language":"en","order":10,"modified_content":null,"preview_url":"https://www.bitdegree.org/crypto/learn/how-to-avoid-rug-pulls-in-crypto","featured_image":{"id":6555,"uuid":"80cbed9d-3b4b-45d9-9a85-d2d8108c0f32","public_url":"https://assets.bitdegree.org/crypto/storage/media/how-to-avoid-rug-pulls.o.jpg","path":"crypto/storage/media/how-to-avoid-rug-pulls.o.jpg","original_path":"crypto/storage/media/how-to-avoid-rug-pulls.jpg","name":"how-to-avoid-rug-pulls.o.jpg","original_name":"how-to-avoid-rug-pulls.jpg","title":null,"alt":null,"width":768,"height":478,"disk":"spaces","status":"uploaded","readable_file_size":"111.99KB"},"youtube_video":null},{"slug":"how-to-avoid-crypto-taxes","title":"The Key Legal Techniques of Avoiding Crypto 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The package is offered to investors as a way for a bank to gain some <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-liquidity/">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>","level":"medium","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,"language":"en","created_at":"2022-02-23T14:33:09.000000Z","updated_at":"2022-05-13T14:32:23.000000Z","preview_url":"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-collateralized-mortgage-obligation-cmo"},"prevSection":{"id":179,"original_id":null,"author_id":41,"translator_id":null,"title":"What is Collateralization?","slug":"what-is-collateralization","section":"C","keyword":"Collateralization","status":"published","definition":"the process of setting an asset as a repayment reassurance when taking out a loan.","content":"<p><strong>Collateralization</strong> is a financial insurance mechanism. The lenders who provide substantial loans may require the borrowers to provide an asset as a guarantee of repayment or to act as a stand-in in case the borrower does not return the loan.</p>\n<p>In this case, the borrower offers a certain type of asset, like property, physical assets such as gold or silver, <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-fiat/">fiat money</strong></a>, <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-cryptocurrency/">cryptocurrency, etc., to act as <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-collateral/">collateral and to receive a loan in a different asset that is worth as much as the collateral.</p>\n<p>If a customer is interested in purchasing property but does not have the required funds for this investment available, they need to take out a loan. A traditional financial institution, like a bank, can offer a mortgage to cover the property costs.</p>\n<p>By accepting the mortgage, the customer agrees that if they default on the mortgage&mdash;fail to pay it back&mdash;the bank will overtake the property ownership.</p>\n<p>Collateralization has become increasingly popular in the crypto market. <strong>Cryptocurrency tokens</strong> are used in the process of lending. Almost any cryptocurrency token can be used as collateral when lending a different token. While collateral tokens act similar to the security measures in the traditional market, their <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-volatility/">volatile nature can make them riskier.</p>\n<p>Since the prices of cryptocurrencies frequently fluctuate, discounting <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-stablecoin/">stablecoins that are <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-pegged-currency/">pegged to a set value of an asset or fiat currency, the collateral offered at the start of the loan contract may have a different value if the borrower defaults on the loan due to market activity. This means that the initial collateral value may be below the loan value.</p>\n<p><a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-are-collateral-tokens/">Collateral tokens</strong></strong></a> have been developed specifically for the purpose of acting as reassurance in crypto loans. Collateral tokens can be accessed on crypto loan platforms or <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-exchange/">crypto exchange</strong></a> services. <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-non-fungible-token-nft/">Non-fungible tokens (NFTs)</strong></a> have also been accepted as a potential collateral option by some lenders.</p>\n<p>Collateralization is primarily a security mechanism set in place for the lenders. Since they run the risk of losing their funds if the borrowers default on the loan, the collateral can cover the potential losses. Furthermore, collateral can act as an incentive for the borrower to pay back the loan. It also helps lower <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-are-interest-rates/">interest rates.</strong></strong></a></p>","level":"medium","meta_title":"What is Collateralization? Definition & Meaning | Crypto Wiki","meta_description":"Collateralization meaning: Collateralization - the process of setting an asset as a repayment reassurance when taking out a loan.","meta_keywords":null,"language":"en","created_at":"2022-02-23T14:21:36.000000Z","updated_at":"2022-05-13T14:32:23.000000Z","preview_url":"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-collateralization"},"currentChapter":"C","currentSection":"what-is-collateralized-debt-position-cdp","chapterTitle":"C","readingLevel":"easy"},"url":"/crypto/learn/crypto-terms/what-is-collateralized-debt-position-cdp","version":"cdd198d50cbe5c9c21c9329d7c096ffc"}" class="container-fluid d-flex crypto-book p-0">
Handbook Cover Page
Crypto Terms: Letter C

What is Collateralized Debt Position (CDP)?

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.
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