Collateralized Debt Position (CDP)

📘 What is a Collateralized Debt Position?

A Collateralized Debt Position (CDP) allows users to mint ESD by locking their assets (collateral) into the protocol. This ensures that every ESD in circulation is backed by over-collateralized assets, maintaining the stability and security of the system.

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Key Features

1. Over-Collateralized Loans Users must provide collateral worth more than the ESD they borrow, ensuring system safety.

2. Flexible Position Management Borrowers can add collateral, repay debt, or withdraw surplus collateral at any time.

3. Automated Liquidation Under-collateralized positions are liquidated via a decentralized auction mechanism to repay the debt and secure the protocol.

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📊 Key Concepts

1. Collateralization Ratio (CR)

$$\text{CR} = \frac{\text{Collateral Value}}{\text{Debt Value}} \times 100$$

• Definition: The ratio of collateral value to debt value.

• Purpose: Ensures that borrowed ESD is fully backed by collateral.

• Liquidation Threshold: If the CR drops below a specified percentage (e.g., 150%), liquidation is triggered.

2. Stability Fee

• Definition: An annual interest rate charged on borrowed ESD, accrued per second.

• Purpose: Generates protocol revenue and ensures long-term sustainability.

• Unit: ray (fixed-point format, ( 10^{27} )).

3. Liquidation Penalty

• Definition: An additional fee applied during liquidation to penalize under-collateralized positions.

• Purpose: Discourages users from approaching the liquidation threshold.

4. Vault

• Definition: A smart contract that tracks each user's collateral, debt, and overall position.

• Components:

  • Collateral (ink): Amount of locked collateral.

  • Debt (art): Amount of borrowed ESD.

  • Normalized Debt: Debt adjusted over time by the stability fee.

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🛠️ How to Use

1. Open a Vault (Create a CDP)

Users can mint ESD by locking collateral in a vault.

Steps:

1. Call the open function to create a vault.

2. Deposit collateral using the join function.

3. Borrow ESD based on the collateralization ratio.

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2. Manage Your Vault

Borrowers can adjust their positions to avoid liquidation or free up locked collateral.

Steps:

1. Add or remove collateral to maintain a safe collateralization ratio.

2. Repay debt to reduce your liabilities.

3. Withdraw surplus collateral if your position is over-collateralized.

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3. Liquidation Process

If the collateralization ratio falls below the liquidation threshold:

1. The system flags the position for liquidation.

2. Collateral is sold via a Dutch auction.

3. Proceeds are used to repay the debt:

   • Liquidators purchase collateral at a discount.

   • Any remaining collateral is returned to the borrower.

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💡 Key Benefits

1. Decentralized Borrowing Borrow ESD without relying on traditional credit systems.

2. Over-Collateralization for Safety Protects the protocol and users by requiring collateral to exceed debt.

3. Flexibility Borrowers can manage their positions or withdraw collateral anytime.

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🧑‍💻 Smart Contract Functions

• TBD

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This CDP system provides users with a secure, flexible, and decentralized borrowing experience, while ensuring the stability of the ESD ecosystem.