What are the advantages of CDP?

• The CDP technology is available to everyone
• If you have chosen to post collateral as security for a loan through a CDP, registration with any regulator or government agency will not be required
• There is no bias in decision-making. Whether you get a loan and the value of the loan depends solely on the amount of collateral you provide. No one is denied a loan because of race, gender, religion or any other protected characteristic.
• All transactions you make are permanently recorded on the blockchain, increasing transparency in the cryptocurrency sector

What are the disadvantages and risks of CDP?

• High collateral volatility. It should always be kept in mind that if the value of your collateral falls below a certain threshold, which is predetermined as a minimum collateral value, you will face liquidation. In the event of liquidation, you do not lose all of your collateral, only the part of it needed to pay the debt, plus a 13 % liquidation penalty.
• Risks associated with smart contracts. Smart contracts are admittedly transparent, which means you don’t have to worry about a verified company with KYC disappearing with your money because you still have your private keys. However, there still exists a risk that smart contracts could be hacked and the assets subsequently acquired by a hacker.
• Inability to repay your debt. If you take out a loan that you spend or lose by speculating on another risky protocol – your collateral remains locked until you are able to repay your debt.

What can users do with the generated DAI?

1. Buying other cryptocurrencies. A common strategy is to buy $ETH with the generated $DAI and put it back into the CDP as collateral. This step can be done several times, as you will always increase the value of the collateral, for which you can then generate additional $DAI. Beware, however, of the high risk involved, and the fact that this strategy only works in a bull market. If the price of $ETH as your collateral suddenly starts to drop rapidly, you can lose big.
2. Option to earn additional interest on $DAI. There are platforms that allow users to deposit $DAI and earn interest in return. This interest is generated a myriad of ways; e.g. from stability fees, liquidity mining, lending, or other creative means.
   Despite the positives, please carefully evaluate the risk of each platform as much as is feasible before depositing any large sum of funds.
3. It can be exchanged for fiat and used for real-world purchases or repayments. Beware of this step, remember that you will have to repay your loan to unlock the collateral. However, the advantage is that if your collateral doesn’t drop, there are no deadlines for repaying the debt.

Conclusion

A CDP is a position that is created when collateral is locked in a MakerDAO smart contract. Through the CDP, a decentralized stablecoin $DAI is generated. With the growing importance of CDP in crypto lending, it is possible that in the future we will see more emerging projects in the decentralized finance (DeFi) space that also take inspiration from this technology.

Personal Opinion

Collateralized debt position (CDP) technology can be helpful in a number of ways. If you set the right investment strategy, CDP opens the door to multiplying your profits in the world of DeFi. Also, your credit can help you pay for various things in the real world. All of this is available to you without having to sell your precious cryptocurrencies, which you can just use as collateral and take back when the loan is repaid. The advantage of CDP is that you can do this entire process anonymously.
Be very careful what the minimum collateral amount is; this is important information, and knowing it (and the terms of the loan) can ensure that you don’t get liquidated! Additionally vital is the  liquidation price of your underlying asset; if the collateral gets close to these levels, you need to either add more collateral, or pay down some of your debt to avoid liquidation.