Eco-Collateralized Debt Position

The primary asset locked in the vault. Unlike standard CDPs, this is typically a tokenized environmental asset, such as:

• Tokenized Carbon Credits (e.g., BCT, NCT)
• Green Bond Tokens
• Renewable Energy Certificates (RECs)
• Natural Capital Tokens (e.g., tokenized forest or mangrove credits)

The value and risk parameters of the CDP are directly tied to the underlying asset's environmental and market characteristics.

Users can mint a stablecoin (e.g., a decentralized USD-pegged asset) against their locked eco-collateral, up to a predetermined collateralization ratio. This creates a debt position. The generated capital is intended for use in sustainability-focused activities, such as funding regenerative projects or green infrastructure, creating a direct link between decentralized finance and real-world ecological action.

The Health Factor is a real-time metric representing the safety of a CDP, calculated as (Collateral Value / Debt Value). If the value of the eco-collateral falls or the debt rises, causing the Health Factor to drop below a liquidation threshold, the position becomes eligible for liquidation. In this process, a portion of the collateral is automatically sold to repay the debt, protecting the protocol's solvency. This mechanism introduces unique volatility risks based on the environmental asset market.

A variable annual percentage yield (APY) charged on the outstanding stablecoin debt. This fee accrues continuously and is added to the user's debt balance. Rates are often governed by decentralized governance and can be adjusted based on market demand for the debt currency and the specific risk profile of the eco-collateral pool. Fees may be recycled into a protocol treasury or sustainability fund.

The minimum ratio of collateral value to debt value that must be maintained to keep a CDP safe from liquidation. Expressed as a percentage (e.g., 150%).

• Initial CR: The minimum ratio required when opening a new CDP.
• Liquidation CR: The threshold at which liquidation is triggered. Eco-CDPs often have higher required ratios than traditional CDPs due to the potential price volatility of environmental assets.

Key risk and operational parameters of an Eco-CDP system are typically managed through decentralized governance. Token holders can vote to adjust:

• Stability Fee rates for different collateral types
• Liquidation ratios and penalties
• Accepted collateral types (whitelisting new eco-assets)
• Oracle selections for price feeds This ensures the system remains adaptable and secure as the market for environmental assets evolves.

An Eco-CDP enables users to lock a protocol's native token (e.g., AAVE, MKR, FXS) as collateral to mint a stablecoin (e.g., GHO, DAI, FRAX). This creates a direct utility for the governance token beyond voting, turning it into a productive asset that generates yield from stability fees and helps control the token's circulating supply.

• CDP Minters: Users who lock collateral to mint the stablecoin, often seeking leverage or liquidity without selling their governance position.
• Governance Token Holders: Benefit from increased demand and utility for the native asset.
• Stability Fee Payers: Minters pay fees (often in the native token) for the privilege of minting, which can be directed to treasury or stakers.
• Protocol Treasury: Often receives fees or manages surplus collateral, using it for ecosystem growth.

• Demand Sink: Creates a fundamental, recurring demand for the native token as collateral.
• Supply Control: Locking tokens in CDPs reduces circulating supply, potentially supporting price.
• Yield Source: Stability fees paid by minters generate a native revenue stream for the protocol or its stakers.
• Reflexivity Risk: Creates a feedback loop where the stablecoin's stability depends on the collateral token's price, which is itself influenced by CDP demand.

• MakerDAO (MKR/DAI): The original model, though DAI now uses diversified collateral. MKR backs the system as the ultimate recapitalization resource.
• Aave (AAVE/GHO): The GHO stablecoin is minted against AAVE collateral, with staked AAVE (stkAAVE) borrowers receiving a discount on fees.
• Frax Finance (FXS/FRAX): FXS is used as collateral in the Frax Lending ecosystem to mint FRAX, with fees accruing to veFXS voters.

• Collateral Volatility: A sharp drop in the native token's price can trigger mass liquidations, exacerbating the downturn.
• Death Spiral Risk: Liquidations force token sales, depressing price and triggering more liquidations—a systemic risk for the entire ecosystem.
• Concentration: Ties the protocol's stablecoin success inextricably to its governance token's health.
• Governance Attack Vectors: Large CDP positions can create perverse incentives in governance votes.

A Traditional CDP (e.g., ETH-backed DAI) uses exogenous, non-correlated assets like ETH or wBTC as collateral. An Eco-CDP uses the protocol's own endogenous governance token. This shifts the risk profile from external market correlation to internal reflexivity, making the system's stability a direct function of its own tokenomics and adoption.

The health of an Eco-CDP depends on a price oracle to determine the value of its locked collateral. An attacker who manipulates this price feed can trigger unnecessary liquidations or allow the creation of undercollateralized debt. This is a systemic risk for all DeFi lending protocols.

• Example: A flash loan attack could temporarily distort the price of the collateral asset on a DEX that the oracle uses.
• Mitigation: Protocols use time-weighted average prices (TWAPs) or aggregate data from multiple, decentralized oracle networks like Chainlink.

If the collateral value falls too close to the debt value, the position is liquidated. The collateral is sold on the open market to repay the debt, with a penalty fee.

• Risk: During high volatility or low liquidity, these sales can cause significant price slippage, potentially leaving the protocol with bad debt.
• Eco-Impact: Some protocols may allocate a portion of liquidation penalties to their sustainability fund, but failed liquidations undermine this mechanism and the protocol's solvency.

The core risk is a bug or exploit in the Eco-CDP's smart contract code. This could allow an attacker to drain collateral or mint unlimited stablecoins.

• Upgradeability Risk: Many protocols use proxy patterns for upgradable contracts. A malicious or compromised governance vote could introduce harmful code.
• Dependency Risk: Eco-CDPs rely on other DeFi building blocks (oracles, DEXs, bridges), inheriting their security risks. A failure in a dependency can cascade.

Many Eco-CDP protocols are governed by a decentralized autonomous organization (DAO) holding governance tokens. Centralization risks include:

• Treasury Control: A small group could vote to divert the eco-funds or protocol fees.
• Parameter Changes: Governance could alter critical risk parameters (like liquidation ratios) unexpectedly, putting positions at risk.
• Voter Apathy: Low participation can make the protocol vulnerable to a takeover by a large token holder.

Eco-CDPs often accept a limited set of high-volatility assets (e.g., ETH, staked ETH derivatives).

• Market-Wide Crashes: A sharp, correlated drop in crypto markets can trigger mass liquidations, overwhelming the system.
• Concentration Risk: If the protocol relies heavily on one collateral type, its stability is tied to that single asset's performance. Diversifying accepted collateral types reduces this risk.

The unique "eco" aspect introduces additional considerations:

• Transparency & Verifiability: Users must trust that fees are correctly routed to and used by the sustainability fund. This requires on-chain verifiability of fund flows and off-chain attestations of impact.
• Regulatory Scrutiny: Marketing a product as "green" or "eco" may attract specific regulatory attention regarding claims of environmental benefit, posing a legal risk to the protocol.

A digital representation of a real-world carbon credit (e.g., a Verified Carbon Unit or VCU) issued on a blockchain. It serves as the underlying collateral for an Eco-CDP, enabling its value to be locked and programmatically managed within smart contracts. Key attributes include:

• Fungibility: Standardized to be traded and pooled.
• Transparency: On-chain verification of origin and retirement status.
• Liquidity: Unlocks capital in environmental markets.

A stablecoin whose supply automatically adjusts (rebases) based on the value of its collateral pool. In an Eco-CDP system, the stablecoin (e.g., a climate-aligned dollar) is minted against tokenized carbon. If the collateral's value rises, new stablecoins can be minted; if it falls, the system may incentivize repayment or trigger a buyback and burn to maintain the peg. This creates a direct link between environmental asset appreciation and monetary expansion.

The minimum ratio of collateral value to debt value required to keep an Eco-CDP open and safe from liquidation. For example, a 150% ratio means $150 of tokenized carbon must back $100 of minted stablecoin. This risk parameter is crucial because:

• It protects the system's solvency against collateral volatility.
• It is typically higher for more volatile environmental assets.
• Users must maintain it by adding collateral or repaying debt.

The automated process of seizing and selling collateral when an Eco-CDP's value falls below its minimum collateralization ratio. This ensures the stablecoin remains fully backed. The process involves:

• Liquidation Triggers: Price oracles detect under-collateralization.
• Liquidation Auctions: Collateral is sold, often at a discount, to cover the debt.
• Liquidation Penalty: A fee paid by the CDP owner, which acts as a deterrent and rewards liquidators.

A movement within Web3 that uses blockchain tools to create positive environmental and social impact. Eco-CDPs are a core ReFi primitive because they:

• Monetize Sustainability: Turn carbon sequestration and other positive actions into liquid financial assets.
• Align Incentives: Reward holders of environmental assets with yield and liquidity.
• Create Circular Economies: Channel capital generated from stablecoin issuance back into regenerative projects.

A trusted data feed that provides external information to a blockchain. For Eco-CDPs, oracles are mission-critical infrastructure that supply:

• Collateral Prices: Real-time market value of tokenized carbon credits.
• Environmental Data: Verification of carbon credit retirement or project health.
• Risk Parameters: Data to adjust collateralization ratios. A failure or manipulation of the oracle can lead to incorrect liquidations or system insolvency.