The MakerDAO CDP is a financial instrument that has never existed before in the history of the world, save for governments themselves. CDP stands for Collateralized Debt Position, and is very similar to how a person with a mortgage could get a loan against their house from their bank. With the CDP, however, the user maintains complete control of their own finances. No third party nor any interpersonal trust is necessary.
To open your own CDP, or just explore the user interface, make sure you have Metamask, Trezor, or Ledger Nano S set up, and head to the CDP Portal. I encourage everyone that already has experience using Web 3.0 to open a CDP with “fun money”; throw $20 worth of ETH into your own CDP just to see how it all works! That’s what I did a long time ago on the old CDP portal (warning: not user friendly) and learned a lot from the experience.
Here’s essentially what happens: a user with an Ethereum address can open a CDP, from which point forward they can access it at the above link, as well as look at additional information about it at mkr.tools/cdps. If the user wants, he or she can then deposit ETH into the CDP. So far, this works essentially like an online bank account. The user can deposit ETH in the CDP and withdraw it when he or she chooses. [edit: Apparently the new CDP Portal insists on generating DAI when you open your CDP. If you don't want to do this, you have two options: generate a negligible amount of DAI such as 1, and pay it off immediately; or open the CDP through the old portal, which is more technical.]
The only risk involved, and really the most interesting part of all of this, comes if the user wants to “take a loan” out against their deposited ETH. Let’s say the user has deposited 30 ETH, for easy math. The CDP Portal would then give the user the option to generate DAI up to 2/3rds of their collateral, in this case 20 ETH. Important note: you don’t want to take out the maximum amount, since a small downturn in the value of ETH could liquidate your CDP! So while the user is given the option to generate (20ETH x 250 DAI/ETH =) 5000 DAI, the user would be wise to take out much less. Let’s say 1000 DAI.
The user then has 1000 DAI, at the risk of dramatic ETH volatility and a reasonable stability fee. This is the part that has never happened before in history. You can create money without having to get credit approval or work with a bank at all! It’s entirely at your own risk. The user can spend the 1000 DAI on whatever he or she likes, buy Amazon giftcards, or buy more ETH to leverage their cryptocurrency position. (DAI is just the Web 3.0 version of cash. DAI isn't trying to do anything special besides be a stable currency just like the US Dollar.)
Whenever the user likes, he or she can pay back the DAI plus the stability fee. There is no deadline on paying it back, unlike a traditional loan. You simply accrue more stability fee interest to pay back the longer you wait.
That’s all there is to it! Now you can own and operate your own global bank account with as much control as the bank itself. There’s one additional button on the CDP Portal to withdraw your deposited ETH. This will not close your CDP, and if you have no DAI taken out, it is just like withdrawing from your bank account. If there is DAI owed, however, withdrawing collateral could dramatically decrease your collateralization ratio, so use that button at your own risk.
It’s crazy to realize that 100% of DAI in the world (as of this writing roughly 80,000,000 in circulation) was created by individuals’ CDPs. For the first year or so of its history, CDPs loaned out DAI at below 2% APR, to encourage adoption (and for more nuanced economic reasons related to the ETH bear market). Recently, though, the upturn in ETH’s price has meant that a lot of people are eager to trade on margin. People can do this with their own CDP, taking out DAI, buying more ETH with it, and hoping ETH goes up in value faster than the CDP stability fee interest rate. This has meant the MakerDAO governance voting to increase the stability fee several time, up to 17.5% APR currently.
What does this mean for individual CDP holders? In exchange for complete anonymity and control over what goes in and out of your CDP, you lose control over the interest rate on any DAI loans you take out. If that isn’t your cup of tea, there are many other options for leveraging or loans with more reliable interest rates, but the trade off might be the loss of anonymity or control you had with your own CDP.
The MakerDAO CDP is truly revolutionary technology; we’re only beginning to understand the impact it could have on global and individual finances. Hopefully you have a better understanding of how it works now. The next step is to try it yourself!