Formula & Calculator
Loan Health Factor (Overcollateralized)
Calculates a single risk score representing how close an overcollateralized crypto loan is to liquidation; a health factor below 1 typically triggers liquidation.
Interpretation
Health Factor = (Collateral Value × Liquidation Threshold) / Debt Value. Measures the safety of a loan position. Used to avoid liquidation.
Variables
| Symbol | Quantity | Unit |
|---|---|---|
| Health Factor | Loan health factor | |
| Collateral Value | Current value of posted collateral | currency |
| Liquidation Threshold | Protocol's liquidation threshold ratio | |
| Debt Value | Current value of debt owed | currency |
What it means
In DeFi lending, the health factor indicates the safety of a loan. A value >1 means the loan is safe; if it falls below 1, liquidation occurs. It is calculated using the collateral value, liquidation threshold (e.g., 80%), and debt value. This is used by borrowers to monitor their positions and to avoid liquidation. Understanding this is essential for using DeFi lending platforms.
Worked example
Loan Health Factor – Two Detailed Examples
Real‑World| Parameter | Value |
|---|---|
| Collateral Value | $15,000 |
| Liquidation Threshold | 0.80 |
| Debt Value | $10,000 |
| Parameter | Value |
|---|---|
| Collateral | $12,000 |
| Threshold | 0.75 |
| Debt | $10,000 |
Common mistakes
- Collateral value: The current market value of the collateral.
- Liquidation threshold: The percentage of collateral value that triggers liquidation (e.g., 80%).
- Debt value: The outstanding loan amount.
- Health factor: >1 means safe; <1 indicates risk of liquidation.
Applications
Loan health factor (overcollateralised) measures the ratio of collateral value (adjusted by liquidation threshold) to debt value, indicating the safety margin before liquidation. A health factor above 1 indicates a safe position; below 1 risks liquidation. Borrowers use it to monitor their positions and to add collateral or repay debt to avoid liquidation. This is a critical metric in DeFi lending protocols. Understanding the health factor helps borrowers manage their risk effectively.
- Monitoring the safety of overcollateralised loans
- Deciding when to add collateral or repay debt
- Managing liquidation risk in DeFi lending
- Assessing the stability of a borrowing position
- Educational understanding of DeFi lending mechanics
Frequently Asked Questions
Health Factor = (Collateral Value × Liquidation Threshold) / Debt Value. A health factor below 1 triggers liquidation. For example, with $15,000 collateral, 0.8 threshold, and $10,000 debt, the health factor is (15000×0.8)/10000 = 1.2, which is safe.
It means you are at the liquidation threshold. Any small drop in collateral value or increase in debt will trigger automatic liquidation. You should top up collateral or repay debt to increase it.
You can either add more collateral to your position or repay part of the debt. Both actions increase the health factor and reduce liquidation risk.
No, it varies by asset type and protocol. More volatile assets have lower liquidation thresholds (e.g., 0.7-0.8) to protect the protocol from price drops.
In volatile markets, check it daily or even more frequently. Some protocols allow you to set alerts when your health factor drops below a certain level.
The protocol will initiate a liquidation, selling part of your collateral to repay the debt. You will incur a liquidation penalty.
In most protocols, you cannot add collateral after liquidation has been triggered. You must act before the health factor drops below 1.
LTV is the ratio of debt to collateral. Health factor incorporates the liquidation threshold, making it a more precise risk metric.