What is a health factor?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 4 min
In short
A health factor condenses how much room a collateralised loan still has into a single number. Below 1, the position is liquidatable in most protocols. It moves with every price change, so any open borrow needs checking regularly rather than once at the start.
Key points
- One number summarising how much buffer a loan has
- Below 1 the position becomes liquidatable in most designs
- It changes with every price tick
- Only adding collateral or repaying improves it
Definition
The value of collateral multiplied by its liquidation threshold, divided by the outstanding debt. A value above 1 means the position has not yet reached the liquidation point.
The formula is collateral value times its liquidation threshold, divided by debt. A reading of 2 means the collateral can roughly halve before liquidation; a reading of 1.05 means a small dip is enough. Protocols use different names for it, but the idea is the same everywhere.
The number moves without you touching anything. ETH collateral falling overnight can leave a position below 1 and already liquidated by morning. If the borrowed asset is a stablecoin the denominator barely moves, so the collateral side is what to watch. With several collateral assets, their declines add up.
There are only two ways to improve it: add collateral or repay part of the debt. Both require submitting a transaction, and in a crash gas prices spike and the transaction may not land in time. That is why positions are usually run at a comfortable level from the outset rather than trimmed to the edge — though no particular number is 'safe'.
Watch out for
- · The figure reflects the oracle price, which can differ from what exchanges are quoting
- · A governance vote lowering the liquidation threshold worsens your number without you trading at all
- · Collateral that can depeg from its reference asset, such as a liquid staking token, can degrade the number abruptly