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A lending health factor is a moving ratio

Understand collateral thresholds, debt growth and why one liquidation price can be an incomplete picture.

DeFi conceptual editorial illustration for A lending health factor is a moving ratio
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THE TAKEAWAY

Monitor both sides of a borrowing position and the protocol's parameters; a snapshot ratio is not a safety guarantee.

Read what the ratio measures

In Aave's model, health factor compares collateral value adjusted by liquidation thresholds with total borrow value. A value below one makes a position eligible for liquidation under the applicable rules. The threshold is not the same as the maximum initial borrowing allowance, and implementation details depend on the market and assets. Read the specific deployment's parameters instead of assuming that a familiar protocol name means identical settings everywhere.

Work through a stress case

Consider hypothetical collateral worth 12,000 dollars, a liquidation threshold of 75 percent and debt worth 6,000 dollars. Adjusted collateral is 9,000 dollars, giving a health factor of 1.5. If collateral value falls to 8,000 while debt is unchanged, the ratio reaches one. If debt has also grown, the same collateral value can produce a lower result. These numbers illustrate sensitivity; they are not a suitable borrowing plan or a forecast.

Watch more than collateral price

Accruing interest can increase debt. A borrowed asset can rise relative to the collateral, and a supposedly stable asset can deviate from its reference value. With multiple collateral and debt assets, many combinations of prices produce the same health factor. A dashboard's single liquidation-price estimate is therefore conditional on its other assumptions. Record those assumptions so that a neat-looking number does not hide changing exposures.

Plan for execution friction

A response plan should account for transaction fees, available repayment assets, network access and the time needed to move funds. An alert can arrive after conditions have already changed, and automation introduces its own dependencies. Ask which oracle prices the position uses, what liquidation bonus applies and whether market parameters can change. Adding collateral or repaying debt may improve the ratio, but neither removes all protocol or asset risks. Evaluate the full mechanism before treating a high displayed number as protection.

READ THE ORIGINAL EVIDENCE

Sources & context

  1. Aave: health factor and liquidations ↗

Sources checked 7 October 2026. This is explanatory coverage, not personalised investment advice. Our corrections policy.

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