Health Factor
A numeric indicator of how safe a borrowing position is relative to liquidation. A health factor above 1 means the position is safe; below 1 means it can be liquidated. Used by Aave and similar protocols.
Your health factor is the number standing between your collateral and a liquidation bot. It tells you, in a single figure, how much breathing room you have before the protocol seizes your assets to cover your loan.
Borrowers watch it like a fuel gauge. Lenders care because it's the mechanism that keeps the protocol solvent — no health factor, no safety net for depositors.
How It Works
The formula is straightforward: (collateral value × liquidation threshold) ÷ total debt. If you deposit $10,000 in ETH with an 80% liquidation threshold and borrow $6,000 in USDC, your health factor is ($10,000 × 0.80) ÷ $6,000 = 1.33. You're safe — for now.
The liquidation threshold isn't the same as the loan-to-value limit. LTV is how much you're allowed to borrow. The threshold is the line where the protocol stops being patient. Aave publishes both figures for every asset in its risk parameters documentation.
When your collateral drops in price — or your debt grows from accrued interest — that health factor number falls. Hit 1.0 and liquidators can step in. They repay part of your loan and take your collateral at a discount, usually 5–10%.
Why It Matters
A health factor below 1.1 is not a warning sign — it's an emergency. Crypto prices move fast enough that a 10% drop can close that gap in minutes, not days.
What is DeFi?
Decentralized Finance — financial services built on blockchain smart contracts that operate without intermediaries. DeFi lending allows users to lend and borrow directly through protocols rather than banks.
Full glossary entryBill's Take
In 25 years of mortgage lending, I never saw a borrower get liquidated in under a minute. A bank calls you, sends letters, gives you months. A smart contract gives you nothing — it just executes. The health factor is the only notice you get, and it's self-service. Nobody is watching it for you.
That ruthless efficiency is the trade-off for better rates and no credit checks. The protocol doesn't care about your circumstances. It cares about one number staying above 1.0.
What to Watch
The common mistake is treating a health factor of 1.2 as comfortable. During a sharp market move, a 20% buffer can evaporate before you've opened your wallet app. Most experienced DeFi borrowers target a health factor of 1.5 or higher — and they set price alerts well before the danger zone.
What is Liquidation Threshold?
The LTV ratio at which a lending protocol will begin liquidating a borrower's collateral. For example, if the liquidation threshold is 80%, your collateral will be sold if your debt reaches 80% of its value.
Full glossary entryVolatile collateral compounds the problem. ETH or BTC as collateral means your health factor is always moving. Stablecoin collateral reduces that risk, but most protocols offer lower LTV limits on stables, which limits how much you can borrow in the first place.
Don't Set It and Forget It
Health factor is a real-time number, not a set-and-forget metric. If you borrow against volatile collateral and don't monitor it — or set automated alerts — you're not managing a position. You're gambling on the market staying still.
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