If you borrow against crypto on a lending protocol, one number matters more than any other: your health factor. It is shown in the app, it changes with every price move, and it decides whether your position stays open or gets liquidated. This article walks through how it works with simple numbers, so you can read it with confidence instead of guessing.
For the broader picture of how borrowing works, see how overcollateralized lending works on Base. Here we go one level deeper into the math and the mechanics.
Two different percentages: LTV and liquidation threshold
Lending protocols usually publish two related numbers for each collateral asset, and they are easy to mix up.
- Loan to value (LTV) is the maximum you are allowed to borrow against the asset when you open a position. It is a limit on borrowing.
- Liquidation threshold is the point at which a position becomes eligible for liquidation. It is always higher than the LTV, and it is a limit on how far things can go wrong.
The gap between the two is your safety buffer. If an asset has an LTV of 75% and a liquidation threshold of 80%, you can start borrowing at up to 75% of your collateral value, and liquidation becomes possible once your debt reaches 80% of that value. The exact numbers differ by protocol, by asset, and can be changed by governance, so always read the values shown in the app rather than relying on examples in articles.
The health factor formula
In protocols such as Aave, the health factor is calculated like this:
Health factor = (collateral value × liquidation threshold) ÷ total debt value
A health factor above 1 means the position is considered safe. A health factor below 1 means the position can be liquidated. At exactly 1, you are on the edge.
Notice that the formula compares two dollar values, so it moves whenever either price changes. If your collateral falls in price, the top of the fraction shrinks. If the token you borrowed rises in price, the bottom grows. Both push the health factor down.
A worked example
Suppose you deposit ETH worth $1,000 as collateral. The liquidation threshold for ETH on this protocol is 80%, and you borrow $500 of USDC.
- Collateral value × threshold: $1,000 × 0.80 = $800
- Debt: $500
- Health factor: 800 ÷ 500 = 1.6
Now the price of ETH falls by 30%. Your collateral is worth $700.
- $700 × 0.80 = $560
- Health factor: 560 ÷ 500 = 1.12
Still above 1, but the margin is thin. If ETH falls a further 15%, to $595, the calculation becomes $595 × 0.80 = $476, and 476 ÷ 500 = 0.95. The position can now be liquidated.
You can also work backward. In this example, liquidation happens when collateral drops to $625, which is a 37.5% fall from the original $1,000. That "distance to liquidation" is a more intuitive way to think about risk than the raw number.
What happens during a liquidation
When the health factor drops below 1, any outside party can act as a liquidator. In practice these are automated bots. A liquidator repays part of your debt and receives a corresponding amount of your collateral, plus a bonus, sometimes called the liquidation bonus or penalty, which is their payment for doing the job. You pay that bonus indirectly, because they receive slightly more collateral than the debt they repaid.
A few details worth knowing:
- Partial liquidation. Many protocols do not close the whole position at once. In Aave v3, the close factor is normally 50%, meaning up to half of the debt can be repaid in a single liquidation. It can rise to 100% when the health factor falls below 0.95 (as in the example above), or when the remaining amounts are very small.
- The bonus is set per asset. Riskier or less liquid collateral generally carries a larger bonus, and changes require a governance decision on Aave v3.
- It is one transaction. The liquidation happens on-chain, in a single step, without a warning message or a grace period.
- You keep the rest. After a partial liquidation your remaining collateral and debt stay in the position, usually with a healthier ratio than before.
Where the prices come from
The health factor relies on price feeds, called oracles, to value your collateral and debt. A wrong or manipulated feed can cause unfair liquidations, so established protocols add safeguards around their sources. See what a price oracle is and why DeFi needs them.
A sudden drop can also push many positions below 1 at once, and liquidators selling collateral into a thin market can push the price down further. That is why a position can look safe one hour and be gone the next.
Ways to manage your health factor
Nobody can predict prices, so the goal is not to guess. It is to leave enough room that a bad day does not decide the outcome for you.
- Borrow well below your maximum. Using the full LTV leaves almost no buffer. Many careful borrowers aim to stay far from the limit, so that a large price drop is needed before liquidation.
- Prefer stable collateral where it fits your goal. A position backed by a stablecoin moves far less than one backed by a volatile token. Read what a stablecoin is and how it holds its peg to understand the remaining risks there.
- Add collateral or repay debt when the number drops. Either action raises your health factor. Doing it early is cheaper than doing it after a liquidation.
- Check the position after big market moves. Alerts can help, but never give a dashboard permission to move your funds unless you understand what you are approving. See how to check and revoke token approvals.
- Watch for interest. On variable-rate loans, interest accrues, so your debt slowly grows even if prices stay flat.
What a health factor does not tell you
A healthy number is not a guarantee. It does not cover smart contract bugs, oracle failures, a collateral token losing its peg, or a phishing copy of the real interface. Confirm the URL before connecting your wallet, and read what a smart contract audit is, keeping in mind that an audit lowers risk but does not remove it.
The takeaway
The health factor is just a ratio: what your collateral is worth after the protocol's safety margin, divided by what you owe. Above 1 the position stands, below 1 it can be liquidated by anyone, usually within moments. Knowing how far your collateral can fall before you reach the line is the difference between borrowing on purpose and being surprised. This article is educational, not financial advice, and protocol parameters can change, so always check the live values in the app you use.
Sources: Aave V3 Overview, Aave Protocol Documentation, Aave v3.3 features, aave-dao/aave-v3-origin, Aave Health Factor: Definition, Formula and Why It Matters, Otomato