Core DeFi Fundamentals Collateralized Debt Positions And Soft Liquidation

…a new platform where you can lock up your Bitcoin and issue a token that can be used anywhere you like. The idea sounds clean – use your assets to generate cash flow without selling them – but at the same time you’re wary. Do you know what goes on under that shiny interface? That is where the world of collateralized debt positions (CDPs) and soft liquidation steps in.

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The Anatomy of a CDP

…the world of collateralized debt positions (CDPs) and soft liquidation. The anatomy of a CDP

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In early DeFi protocols, liquidation was a hard event. Since the dawn of the first platforms, the community was forced to step in, but soft liquidation was a game changer, making it clear that not every loss was punitive.

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MakerDAO’s DAI protocol remains one of the most visible examples of CDPs with soft liquidation. The auction is not a one‑shot event; it runs in stages, a dynamic process that can be found in detail in “The Mechanics of Soft Liquidation in Collateralized Debt Positions.”( /the-mechanics-of-soft-liquidation-in-collateralized-debt-positions)

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Because soft liquidations rely on community participants to buy collateral and pay down debt, governance is crucial. Protocols usually assign a liquidation fee that is shared among all parties: the auction participants and, in some cases, the treasury or the community pool. The mechanics are designed such that the incentives align – people are motivated to step in and keep the system solvent. Governance also sets the parameters: the collateralisation ratio, the liquidation penalty, and the auction duration. A sudden change in any of these can ripple through the entire ecosystem. That’s why proposals typically go through a voting process that involves token holders. In a sense, the protocol is a living garden that all stakeholders tend together, following the principles laid out in “Foundational Principles of CDPs and Soft Liquidation in Decentralized Finance.”(/foundational-principles-of-cdps-and-soft-liquidation-in-decentralized-finance)

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