Health Factor
A numeric score in lending protocols representing the safety of a borrower's position; below 1.0 triggers liquidation.
Health Factor — Health factor is a numerical score used by DeFi lending protocols to measure the safety of a borrowing position. A health factor above 1.0 means the position is sufficiently collateralized, while a health factor at or below 1.0 triggers liquidation eligibility. Most protocols display health factor prominently to help borrowers manage their risk.
How It Works
The health factor is calculated by dividing the adjusted collateral value by the total outstanding debt. The formula is: Health Factor = (Collateral Value x Liquidation Threshold) / Total Debt. For example, if you deposit $10,000 in ETH with an 85% liquidation threshold and borrow $5,000 USDC, your health factor is ($10,000 x 0.85) / $5,000 = 1.70.
The liquidation threshold is a protocol-defined parameter for each collateral asset that accounts for its volatility. Stable assets like USDC have thresholds around 90-95%, while volatile assets like ETH have thresholds around 82-86%. The threshold acts as a safety margin that triggers liquidation before the collateral value actually falls below the debt value.
Health factor changes in real time as collateral asset prices fluctuate. A sharp drop in your collateral's price reduces the numerator, lowering the health factor. Accruing borrow interest increases your debt (the denominator), also gradually reducing health factor over time.
Why It Matters in DeFi
Health factor is the single most important metric for any DeFi borrower to monitor. It directly determines whether your position is safe or at risk of liquidation. Experienced borrowers maintain a health factor above 1.5-2.0 to provide a buffer against sudden price movements, especially during periods of high market volatility.
Many DeFi dashboards and portfolio trackers display health factor prominently and allow users to set alerts when it drops below a threshold. Some advanced DeFi tools offer automated position management that deposits additional collateral or repays debt when the health factor approaches dangerous levels.
Real-World Example
A trader on Aave v3 has deposited $20,000 in WBTC (liquidation threshold: 82%) and borrowed $10,000 USDC. Their health factor is ($20,000 x 0.82) / $10,000 = 1.64. If BTC drops 20%, the collateral becomes $16,000 and the health factor falls to ($16,000 x 0.82) / $10,000 = 1.31 — still safe. But if BTC drops 40%, the collateral becomes $12,000 and the health factor drops to ($12,000 x 0.82) / $10,000 = 0.98 — below 1.0, making the position liquidatable.
Related Terms
Liquidation (DeFi)
The automated forced sale of collateral when a borrower's health factor drops below a minimum threshold in a lending protocol.
Read definition DeFi & AMMOvercollateralization
Posting more collateral than the value borrowed in DeFi lending, the standard mechanism for managing default risk without credit scores.
Read definition DeFi & AMMBorrow Rate
The interest rate charged for borrowing assets in a DeFi lending protocol, dynamically adjusted based on utilization.
Read definition DeFi & AMMUtilization Rate
The percentage of a lending pool's total deposits that are currently borrowed; drives dynamic interest rates in Aave and Compound.
Read definitionFrequently Asked Questions
Common questions about Health Factor in cryptocurrency and DeFi.
Most DeFi risk experts recommend maintaining a health factor of at least 1.5 for volatile collateral and at least 1.25 for stablecoin collateral. During periods of high market volatility, increasing your buffer to 2.0 or above provides additional protection against rapid price drops.
You can improve your health factor by depositing more collateral (increasing the numerator) or repaying part of your debt (decreasing the denominator). Both actions are available at any time through the lending protocol's interface as long as you have the assets and gas to execute the transaction.
Yes. Your total debt includes accrued interest, which increases over time. This means your health factor slowly decreases even if collateral prices stay flat. The effect is gradual for most assets but can be significant for high-interest-rate borrows held over long periods.
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