Crypto Gloss

Health Factor

The health factor is a single number that tells you how far your DeFi borrowing position is from liquidation — any value above 1.0 is safe; anything at or below 1.0 means your collateral can be seized by liquidators. First popularized by Aave, the health factor is now the standard risk metric across the most widely used DeFi lending protocols, giving borrowers a simple, real-time pulse check on the health of their position without having to manually calculate collateral ratios.

How It’s Calculated

The health factor formula is:

Health Factor = (Total Collateral Value × Liquidation Threshold) ÷ Total Borrowed Value

Where:

  • Total Collateral Value — current USD value of all assets deposited as collateral
  • Liquidation Threshold — a per-asset parameter set by the protocol (e.g., ETH might have a 82.5% threshold on Aave, meaning 82.5 cents of borrowing power per dollar of ETH collateral)
  • Total Borrowed Value — current USD value of all outstanding loans (principal + accrued interest)

Worked Example

Variable Value
ETH deposited 1 ETH = $3,000
ETH liquidation threshold (Aave) 82.5%
USDC borrowed $2,000
Health factor ($3,000 × 0.825) ÷ $2,000 = 1.24

If ETH drops from $3,000 to $2,424:

  • HF = ($2,424 × 0.825) ÷ $2,000 = 0.999 → liquidation triggered

Key Thresholds

Health Factor Status
> 2.0 Very safe; significant price buffer
1.5 – 2.0 Safe; moderate buffer
1.1 – 1.5 Caution; monitor closely
1.0 – 1.1 Danger zone; minor price move triggers liquidation
≤ 1.0 Liquidatable — liquidators can now seize collateral

Health Factor vs. LTV

Health factor and loan-to-value (LTV) are related but distinct concepts:

  • LTV measures how much you borrowed relative to your collateral value (a ratio of what you owe vs. what you deposited)
  • Health factor incorporates the liquidation threshold — a risk parameter that is lower than the maximum LTV — to create a buffer before actual liquidation

A protocol might allow you to borrow up to 75% LTV on ETH, but the liquidation threshold is set at 82.5% — meaning you won’t actually get liquidated until your loan reaches 82.5% of your collateral value, giving you some room to absorb price drops before the position goes critical.

What Affects Your Health Factor

Health factor decreases (riskier) when:

  • Collateral token price falls
  • Borrowed token price rises (relevant for non-stablecoin loans)
  • Interest accrues on the loan over time
  • You borrow more against the same collateral
  • You withdraw collateral

Health factor increases (safer) when:

  • Collateral token price rises
  • You repay part of the loan
  • You deposit more collateral
  • You repay accrued interest

Liquidation When HF Falls Below 1.0

When a health factor hits exactly 1.0, the protocol opens the position to liquidators. Liquidators are bots (and sometimes humans) who:

  1. Repay part of the borrower’s outstanding debt (typically up to 50% in one liquidation call on Aave)
  2. In exchange, receive the equivalent collateral value plus a liquidation bonus (typically 5–15%, protocol-dependent)
  3. The liquidation bonus comes from the borrower’s collateral — this is the financial penalty for getting liquidated

Example:

  • You borrowed $2,000 USDC against ETH, and your position gets liquidated
  • A liquidator repays $1,000 USDC on your behalf
  • The liquidator receives $1,000 worth of your ETH plus a 5% bonus = $1,050 in ETH
  • Your debt is reduced by $1,000; your collateral is reduced by $1,050

Protocol Differences

Protocol Term Used Notable Behavior
Aave Health Factor Multi-collateral; shows HF in UI; auto-calculates per-asset thresholds
Compound Account Liquidity Expressed differently (shortfall in USD, not a ratio); functionally equivalent
MakerDAO Collateralization Ratio Displayed as a percentage (e.g., 200%); inverse of LTV
Euler Finance Health Score Similar to Aave; isolated markets affect calculation differently
Morpho Health Factor Inherits from underlying Aave/Compound markets

How to Manage Your Health Factor

Conservative strategies:

  • Keep HF above 1.5 as a personal minimum
  • Set protocol-level alerts (Aave has email/push alerts; third-party tools like DeFi Saver, DeBank, and Instadapp offer real-time monitoring)
  • Use stablecoins as collateral for stablecoin loans (USDC → borrow DAI) — price correlation keeps HF near-constant

Risk management tools:

  • DeFi Saver — automatically repays or tops up collateral to maintain a target HF
  • Instadapp — similar automation; also supports Aave and Compound
  • Aave Safety Module — not a health factor tool, but staking AAVE earns yield that offsets loan interest, effectively improving net position

See Also