Health Factor
The health factor is a risk number used by DeFi lending protocols such as Aave to show how far a borrowing position is from liquidation. Above 1 the position is safe from liquidation; at or below 1 it can be liquidated.
How the health factor is calculated
The basic formula is the value of your collateral, multiplied by its liquidation threshold, divided by the value of your debt. The liquidation threshold is a percentage set for each collateral asset, for example 80%, reflecting how much of its value the protocol counts as safe backing.
If you hold several collateral assets, each is weighted by its own threshold and the results are added up. Prices come from oracles, services that feed market prices onto the blockchain, so the number updates as markets move.
A worked example
Say you deposit ETH worth 10,000 dollars with a liquidation threshold of 80% and borrow 5,000 USDC. Your health factor is 10,000 times 0.8, which is 8,000, divided by 5,000: 1.6. If ETH falls 37.5%, your collateral is worth 6,250, which times 0.8 gives 5,000, and your health factor drops to 1.0. At that point liquidators can repay part of your debt and take a matching amount of your collateral plus a bonus.
What moves it
The health factor falls when collateral prices drop, when the borrowed asset's price rises, or as interest accrues on your debt. It rises when you add collateral, repay debt, or when prices move in your favour. Borrowing more lowers it immediately.
Staying away from liquidation
A health factor just above 1 leaves little room: in a fast market, prices can move several percent in minutes, and during wider sell-offs many liquidations at once can push prices down further. Users who want a buffer often keep their health factor well above 1, monitor positions with alerts, and know in advance whether they would add collateral or repay debt.
Liquidation is not only a loss of the collateral sold. The liquidation bonus paid to liquidators comes out of your collateral, so each liquidation costs more than simply closing the position yourself.
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Frequently asked questions
What happens when my health factor falls below 1?
Your position becomes eligible for liquidation. Liquidators repay part of your debt and receive some of your collateral at a discount, which is a loss for you.
What is a safe health factor?
There is no guaranteed safe level. The higher it is, the larger the price drop your position can absorb; what is enough depends on the collateral's volatility.
Do all lending protocols use a health factor?
Not all use the name, but most track a similar measure of debt against risk-weighted collateral, sometimes expressed as LTV or a collateral ratio.
Related terms
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