Health Factor
Metric indicating how close a position is to liquidation.
Health factor is a DeFi risk metric that shows how close a collateralized borrowing position is to liquidation. It compares risk-adjusted collateral value with outstanding debt under a protocol's formula. A health factor below the liquidation threshold, often represented as 1, allows liquidators to repay debt and claim collateral.
The calculation usually applies each collateral asset's liquidation threshold, then divides the adjusted total by the value of borrowed assets. Exact formulas, price sources, and display rounding differ. A value of 2 suggests more room than 1.1, but does not mean the position can survive every 50% price move because debt prices, multiple assets, and parameter updates interact.
Health factor matters because liquidation is automatic and can occur at any time. Falling collateral prices, rising debt-asset prices, accumulated interest, or stablecoin depegs can reduce it. Liquidators receive a bonus or discount, so the borrower loses more than the repaid debt and may realize tax consequences.
Borrowing near the maximum leaves little response time. Oracle updates can move in steps, markets can gap, and block space becomes expensive during volatility. Adding collateral through a bridge may take too long. Alerts are helpful but do not guarantee delivery before liquidation. A conservative buffer should reflect asset volatility, liquidity, correlation, and how often the position is monitored.
Users can improve health by repaying debt or adding accepted collateral. Each action adds transaction and protocol risk. Depositing more of the same falling asset increases exposure, while selling collateral to repay may crystallize a loss but reduce leverage. The correct response depends on finances and protocol conditions.
Before borrowing, review the formula, liquidation threshold, penalty, oracle, interest model, admin powers, and market history. Set independent alerts and keep repayment liquidity on the correct chain. Avoid assuming a green dashboard means permanent safety. Health factor is a current risk indicator based on selected prices and parameters, not a guarantee against liquidation, contract exploits, or market failure.
Record the position and response plan outside the primary interface. If the frontend fails during volatility, direct contract access or another supported interface may be necessary to repay safely.
Frequently asked questions
- No universal health factor is safe. A value above one may avoid immediate liquidation under current data, but volatile or correlated assets need a much larger buffer. Borrowers should model sharp price moves, interest growth, oracle updates, congestion, and liquidation penalties. Protocol formulas differ, so understand the specific threshold instead of following a generic 1.2 or 1.5 rule.
- Collateral may have fallen, the borrowed asset may have risen, debt interest may have accrued, or protocol parameters and oracle prices may have changed. Yield-bearing collateral can also depeg. Check the official market, independent price sources, transactions, and governance updates. Improve health by repaying debt or adding eligible collateral, while considering gas, bridge, and smart contract risk.
- Some tools can send alerts, automatically repay debt, add collateral, or close positions when thresholds are reached. Automation adds smart contract permissions, keeper reliability, oracle, gas, and configuration risk. Use limited allowances, conservative triggers, and independent monitoring. Maintain a manual repayment route because congestion, paused contracts, bridge delays, or a rapid gap can defeat automation before it acts.