Stablecoins are one of the most useful applications of blockchain technology to date. These essential tools provide users with a reliable store of value for use in trading, lending, and borrowing. Collateralized debt position (CDP) stablecoins stand out from other versions of this product segment for their decentralized, asset-backed structure that can enhance trust and security levels. 

There are many examples of successful CDP stablecoins, and reviewing these makes it possible to see their vast potential. Oasis is excited to support builders who bring CDPs to the Oasis Network, and it’s important to understand what CDPs are and how they contribute to the Oasis ecosystem. This article offers an introduction to CDPs, examples, prospective benefits, and a preview of CDPs on Oasis. 

‍What is a CDP Stablecoin? 

A CDP stablecoin is a stablecoin that locks up collateral, often crypto assets, in a smart contract to generate a stablecoin. This process generally involves over-collateralization, meaning the value of the locked assets must exceed the value of the stablecoins issued to reduce the risk of default. CPDs also feature stability fees that act as a soft mechanism to contract or expand a stable's supply, and therefore its price, on the market.

With a CDP, users can borrow against their collateralized assets while maintaining exposure to potential price appreciation, but they must also manage their positions to avoid liquidation if the value of their collateral drops significantly. MakerDAO originated this approach with single collateral DAI, which was later expanded to numerous collateral types. Currently, CDP architectures are the dominant form of stablecoins, after the likes of USDC/USDT. 

A simplified flow of funds in CDP stablecoins

What are Some Examples of CDP Stablecoins?

Consider these three (3) examples of CDP stablecoins. 

MakerDAO: DAI 

The original CDP stablecoin, DAI, is a decentralized stablecoin issued by MakerDAO on Ethereum. It’s minted through CDPs (or “vaults”) that allow users to lock up crypto collateral, such as ETH, in exchange for DAI. MakerDAO over-collateralizes DAI to ensure that the value of the collateral exceeds the debt, keeping DAI’s peg to the USD stable even during periods of high volatility.

Benefits:

• Liquidity & Accessibility: DAI provides critical liquidity in Ethereum’s DeFi ecosystem, serving as a stable asset within lending protocols, Dexs, and savings products.
• Resilience & Decentralization: MakerDAO’s decentralized governance structure has helped maintain the stability of DAI, creating a high level of user trust.
• Cross-Protocol Compatibility: DAI’s versatility has made it a key asset across the Ethereum landscape, enabling integration with numerous protocols and promoting growth.

Liquity: LUSD 

Liquity, a decentralized lending protocol on Ethereum, issues LUSD, a stablecoin backed by ETH collateral. Unlike traditional CDP models, Liquity uses a minimum collateralization ratio of 110%, making it extremely capital-efficient. Users can mint LUSD without paying interest, instead incurring a one-time issuance fee, which is unique among CDP stablecoins.

Benefits:

• Capital Efficiency: With a lower collateralization requirement than most CDPs, Liquity provides a more accessible and efficient model.
• Interest-Free Borrowing: By allowing users to mint LUSD without paying ongoing interest, Liquity encourages long-term participation and provides a low-cost stablecoin option.
• Stability & Security: Liquity’s stability pool, maintained by users who deposit LUSD to cover liquidations, ensures system resilience and stability.

Prisma Finance: mkUSD

Prisma Finance is an emerging protocol that offers CDPs collateralized by liquid staking derivatives. By allowing users to leverage staked ETH derivatives as collateral, Prisma supports the creation of stable assets while enabling participants to retain exposure to ETH staking rewards. Prisma supports multiple collateral types so that users can open multiple vaults.‍

Benefits:

• Staking-Backed Stability: Prisma allows users to mint stablecoins while still earning rewards from staked assets, adding a new dimension to stablecoin issuance.
• Staking Synergy: Using LSDs, Prisma aligns closely with Ethereum staking, encouraging greater liquidity and growth within this sector.
• User Rewards: Prisma’s model promotes user participation through incentives, driving liquidity into the protocol and fostering a stable, well-capitalized DeFi environment.

Benefits of a CDP Stablecoin for Oasis Sapphire

The success of CDP-based stablecoins on Ethereum demonstrates the transformative impact they can have on an ecosystem. Introducing a CDP stablecoin on the Oasis Sapphire could create similar advantages, especially in supporting the growth of the Sapphire DeFi ecosystem and driving further demand for the ROSE token. Here’s a rundown of potential benefits. 

Increased Liquidity 

A CDP stablecoin on Sapphire would create new demand and utility for ROSE if used as collateral. This could incentivize users to hold and stake ROSE, boosting liquidity and reducing volatility. Enhanced liquidity could, in turn, support dApp development and DeFi innovation on Oasis, similar to the way DAI has driven DeFi adoption on Ethereum. 

Private Stablecoin Transactions

With Oasis Protocol’s confidential smart contracts, a CDP stablecoin could offer DeFi transactions for users who prioritize privacy. Privacy-enhanced transactions would give Oasis’s CDP a unique value proposition, as users could engage in lending, trading, and staking activities without exposing their data—a feature unavailable on most other blockchains.

Collateral Flexibility 

An Oasis Sapphire CDP could support multiple collateral types, allowing users to leverage assets beyond ROSE. This flexibility would foster interoperability, enhance liquidity, and build resilience in the ecosystem. The collateral types could also extend to staked assets like wstROSE (recently launched by Accumulated Finance), allowing users to retain ROSE staking rewards while using their stablecoin elsewhere. 

Community-Driven Governance 

A CDP on Oasis could leverage a decentralized governance model, giving ROSE holders a role in decisions such as setting collateralization ratios and fees. This governance structure would align with decentralization ethos, ensuring that the stablecoin’s management is user-driven. Such an approach could foster trust and encourage active participation from the Oasis community.

A New Era for Oasis Protocol 

It’s important to note that CDP stablecoins carry risks. These include the possibility of de-pegging, collateralization risk, and smart contract bugs. However, introducing a CDP also makes it possible to unlock a great deal of value. Drawing lessons from successful models like DAI, LUSD, and Prisma, it’s possible to envision a CDP stablecoin that fosters liquidity, privacy, and decentralized governance.

One of the first teams to explore this on Oasis Sapphire is Bit Protocol. Supported by a decentralized collateral base, including ROSE, yield-bearing collaterals such as liquid staked tokens (LSTs), and an omnichain expansion plan, Bit Protocol is working on infrastructure and a stable unit of account for privacy-centric DeFi. Learn more about the project here.