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Collateral and CDPs

This module explains how collateral and Collateralized Debt Positions (CDPs) work on Indigo, and what liquidation means for you.

Learning outcomes

  • Explain how collateral backs minted iAssets.
  • Describe what a CDP is and how the collateralization ratio works.
  • Understand when and why liquidation happens and how to reduce your risk.

What is collateral?

Collateral is the asset you lock in the protocol to back the iAssets you mint. On Indigo, typical collateral includes ADA and possibly liquid staking tokens (e.g. staked ADA that is represented as a token so you can use it in DeFi). The protocol values your collateral using oracle prices; that value determines how much debt (iAssets) you are allowed to have.

You do not “sell” your collateral when you mint — you lock it. As long as your position is healthy, you can later repay your debt (burn iAssets) and unlock your collateral (minus any fees).

What is a CDP?

A Collateralized Debt Position (CDP) is your individual position in the protocol: it ties together:

  • The collateral you have locked (type and amount).
  • The debt you have minted (e.g. iUSD).
  • The collateralization ratio: (value of collateral) ÷ (value of debt).

Example: you lock 1000 ADA and the oracle says 1 ADA = 0.50 USD. Collateral value = 500 USD. If the minimum ratio is 150%, you can mint at most 500 ÷ 1.5 ≈ 333 iUSD. If you mint 200 iUSD, your ratio is 500 ÷ 200 = 250% — a comfortable buffer.

Why does the ratio matter?

The minimum collateralization ratio is a protocol parameter (e.g. 150% or higher). If your ratio falls below this minimum (e.g. because ADA price drops), your position becomes under-collateralized and can be liquidated:

  • Part of your collateral can be used to repay your debt and keep the system solvent.
  • Liquidation may involve penalties or different treatment for the liquidated user and for Stability Pool participants who “absorb” the debt.

So the ratio is your safety margin. Higher ratio = more room for collateral price to fall before liquidation.

How to keep your position safe

  1. Mint conservatively — Do not mint up to the maximum; leave a buffer (e.g. aim for 200%+ if the minimum is 150%).
  2. Monitor prices — If your collateral (e.g. ADA) drops in price, your ratio drops. Check the app’s “liquidation price” or equivalent.
  3. Add collateral or repay debt — Adding more collateral or burning iUSD (repaying debt) increases your ratio and reduces liquidation risk.
  4. Understand fees and incentives — Some actions may have fees; Stability Pool participants may have incentives to liquidate under-collateralized positions. This is by design to keep the peg stable.

Summary

  • Collateral = assets you lock to back the iAssets you mint.
  • CDP = your position: collateral + debt + collateralization ratio.
  • Liquidation = when the ratio falls below the minimum; part of your collateral may be used to repay debt.
  • Best practice = mint less than the max, monitor the ratio, and add collateral or repay debt when needed.

Next: Using Stability Pools — what Stability Pools are and how to join one.