CDP explained - what motivates people to open them?

Indigo Discussion
1

Hello,

I am reading the docs at Collateral Debt Position (CDP) - Indigo Documentation and I still can’t understand what motivation people should have to participate - basically when you want iUSD you have 2 options:

  1. buy it on exchange for close to 1$ price - no risks involved
  2. open CDP where you have to pay more than real value of the underlying tokens and risking liquidation of your deposit in case of price turbulence

What do people get from opening CDP other than underlying asset for price higher than from DEX? What is the motivation for doing that? It seems to me that in best case scenario you get the asset for really bad price and in worst case you get liquidated.

Can someone explain this concept to me?

2

I see two ways to participate,

  • Arbitration - Buy low sell high
  • Stability Pool - Mint the iAsset and send it to the stability pool and earn rewards in ADA.

Indigo is very young and some of these strategies may still not be very profitable, but more strategies will soon be possible. An example is shorting an asset by selling it in the market or exposing yourself to an interesting market asset such as iGold, iBTC, iETH.

3

Well, but arbitration can’t really be done when with CDP you always “buy high sell low” - the price you pay when opening CDP is significantly higher than DEX price, since the collateral is at least 110%, it’s always at least 10% more expensive than DEX price.

You can participate in stability pool using tokens you bought from DEX just the same, except it’s much cheaper. For this reason I can’t understand the motivation for opening CDP in the first place. I mean - someone has to be first to actually mint the tokens right, but after the price stabilizes it doesn’t seem to make much sense to me.

4

Different users have different goals. Many users, including myself, are happy to open CDPs. Arguably they’ve been a little too happy, which has caused the sell pressure of iUSD.

Some motivations may include to create an advanced trading strategy, to create a leveraged position, or to create a short position.

5

ok so there is no financial incentive? no reward or any other benefit from being owner of CDP?

just to give you an idea right now, if I want to open CDP for iUSD with 10000ADA collateral with 110% ratio, I’d get 2826 iUSD. On muesli swap I can exchange 10000ADA for 3023 iUSD.

Both can be later used in stability pool. So the only theoretical advantage of opening CDP position is when the tokens price is “off” by bigger margin compared to DEX in a way that opening CDP and selling it on a DEX would make you a profit? Or else, why would anyone do that?

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6

If no one saw the value to open a CDP then the iAssets wouldn’t be listed on the DEXs to begin with. Many people do see value for the reasons listed above.

Depending on what your goals and preferences are, you may want to mint iAsset, or you may want to buy iAsset.

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