Collateralized Debt Position, known as CDP, is a smart contract where you can store you ETH as collateral to give you a chance to take out a loan. Maker’s CDP helps you get a decentralized credit in DAI stable coin.
If you are a long Ethereum hodler, you can use your ETH position as leverage using Maker’s CDP. You will be investing your fiat into ETH. ETH hodlers can lock their ETH safely as collateral and take out a loan in DAI that you can use to buy more ETH. The principle of using ETH as Leverage via Maker’s CDP is almost the same as margin trading.
However, you must repay your money before your CDP gets liquidated. You could use your collateral (your ETH) if you failed to pay for your CDP before liquidation.
Make sure that the liquidation price is low before using ETH as collateral for CDP. An example of a bad loan setup is if you use 150 ETH as collateral in CDP. Ether price is now at $900. The minimum collateral ratio of Maker’s CDP is at $150. It means that you can take out 90,000 DAI, which is equivalent to around 100 ETH) as a loan.
However, the liquidation price for borrowing the maximum amount allowed (two-thirds of your collateral), is 900. If the price drops below the maximum amount allowed, your CDP is at risk of getting liquidated. You will risk losing your collateral for a lower price. Make sure that you repay your money before letting CDP liquidate your collateral.