CDP-Based Synthetic Protocols

Collateralized Debt Position (CDP) protocols are sets of smart contracts that allow users to mint new cryptoassets, often referred to as "synthetic assets," by using existing assets as collateral 1. In essence, CDPs enable users to leverage their assets without needing a counterparty to supply the loaned funds 1.

CDP-based synthetic protocols can be broadly categorized based on the type of debt they issue and the asset they target:

1. Stablecoin CDP Models

These models are designed so that the dollar value of a user's debt is inversely correlated to the dollar value of their collateral 1. The debt supply is generated by users who are long on their collateral asset and is matched by users who demand a stable asset relative to the dollar 1.

Debt Target: Typically pegged to $1 USD 2.
Debt Type: Singular (e.g., Dai or MIM) 2.
Examples: MakerDAO (which issues Dai) and Abracadabra (which issues MIM) 2 1. QiDao is another example, known as a large issuer of synthetic CDP-based USD stablecoins on Polygon 3.

2. Synthetic Asset CDP Models

These protocols accept a variety of assets as collateral but, unlike stablecoin models, they do not restrict users to a singular form of debt pegged to a stable unit 1. Instead, they allow users to mint theoretically infinite varieties of debt that target specific assets 1.

Debt Target: Real asset prices (e.g., the price of a stock or commodity) 2.
Debt Type: Multiple synthetic assets (Synths) 2.
Examples: Synthetix and Mirror 2 1.

Key Mechanisms and Innovations

While all CDP protocols function by backing debt with the market value of the collateral, they differ significantly in their liquidation and fee structures 2 1.

Protocol	Collateral	Debt Type(s)	Debt Target Peg	Forced Liquidations	Fee Structure
MakerDAO	General crypto assets (e.g., ETH, USDC)	Singular (e.g., Dai)	$1 USD	Yes	Variable interest and liquidation fees 2
Abracadabra	Yield-bearing and general crypto assets	Singular (e.g., MIM)	$1 USD	Yes	Fixed interest and liquidation fees 2
Synthetix	Synthetic assets (e.g., SNX, ETH)	Multiple (e.g., sUSD, sETH)	Real asset price	Yes	Fixed issuance and variable interest fees 2
Mirror	Assets like UST, mAssets	Multiple (e.g., mAAPL, mBTC)	Real asset price	Yes	Fixed issuance fee (0.3%) and 1.5% closure fee 2
Alchemix	Yield-bearing assets with on-chain yield sources	Hybrid structure	Collateral price	No	10% of generated yield is charged 2

Liquidation Mechanisms

Traditional CDP models, such as MakerDAO and Liquity, rely on hard liquidations, where a user's collateral is sold off if the collateral ratio falls below a predetermined percentage . Once liquidated, the collateral cannot be recovered .

Newer protocols have introduced alternative liquidation methods:

Alchemix: This protocol is designed so that forced liquidations are never necessary 1. It achieves this by tying the debt target to the collateral price and using the collateral to generate yield, which automatically repays the debt over time 2 1. This removes liquidation risk, incentivizing users to borrow the maximum amount 1.
crvUSD (LLAMA): The Lending-Liquidating AMM Algorithm (LLAMA) used by crvUSD employs soft liquidation . Instead of a hard liquidation, the protocol establishes an Automated Market Maker (AMM) between the collateral and the stablecoin . As the collateral price decreases, the protocol gradually sells off only a portion of the collateral for crvUSD . If the collateral price recovers, the protocol repurchases the sold collateral .

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