DeFi CDP

Learn more about DeFi CDP protocols with Bunny Board.

What Are CDP Protocols?

A CDP protocol enables users to deposit crypto assets as collateral and issue debt tokens like stablecoins against this collateral. Borrowers can use these tokens for various DeFi activities while maintaining their exposure to the underlying crypto.

1. Collateralization: Users deposit assets like ETH or BTC into the protocol's smart contract. The value of the collateral must exceed the borrowed amount (over-collateralization).

2. Debt Minting: In exchange for collateral, borrowers mint tokens pegged to fiat currencies (e.g., DAI in MakerDAO).

3. Liquidation: If the collateral value drops below a set threshold, the protocol liquidates the collateral to cover the debt.

Key Metrics Tracked

1. Total Collateral: Represents the total value of assets deposited into the protocol as collateral. This ensures the stability and security of the system.

2. Active Loans: Measures the total outstanding loans issued by the protocol, reflecting user demand for borrowing.

3. Borrow Fees: These are fees borrowers pay for taking out loans, calculated as a percentage of the loaned amount.

4. Protocol Revenue: Revenue generated by the protocol from borrow fees, liquidation penalties, or other charges.

5. Collateralization Ratio: Reflects the ratio of collateral deposited to the debt issued. A higher ratio indicates a safer and more stable system.

Benefits of CDP Protocols

• Liquidity without Selling: Users can access liquidity without liquidating their assets, maintaining long-term exposure.

• Decentralization: Operates without central intermediaries, offering greater transparency and inclusivity.

• Yield Opportunities: Borrowed stablecoins can be reinvested in DeFi for additional returns.

Risks to Consider

• Volatility: Collateral prices can fluctuate significantly, leading to liquidations.

• Over-Collateralization: Users must lock in more value than they borrow, which can be capital-inefficient.

• Smart Contract Risks: CDP protocols rely heavily on the security of their smart contracts.

DeFi CDP protocols are transforming traditional lending by offering decentralized, permissionless alternatives. By understanding their mechanics and metrics, users can maximize their benefits while mitigating risks. Whether you're a borrower or a data enthusiast, platforms like BunnyBoard can help you stay informed and ahead in this dynamic space.