Health Factor

A health factor is a single number, used by lending protocols such as Aave, that summarizes how safe a borrowing position is: above 1 the position is solvent, and at or below 1 it becomes eligible for liquidation. It condenses the relationship between collateral value, debt value, and each asset's liquidation threshold into one figure a borrower can watch.

The calculation weights each collateral asset by its liquidation threshold, then divides by total debt. A concrete example: a user deposits ETH worth 10,000 dollars with a liquidation threshold of 80 percent and borrows 4,000 dollars of USDC. Their health factor is (10,000 × 0.80) / 4,000 = 2.0 — comfortable. If ETH falls until the collateral is worth 5,500 dollars, the factor drops to 1.1, uncomfortably close to liquidation. Repaying part of the debt or adding collateral pushes it back up.

A common misconception is that a health factor above 1 means a position is safe — it only means it is safe at this instant, and volatile markets can push it below 1 within minutes, triggering liquidation and its penalty. Experienced borrowers keep the factor well above 1.5 or 2, set alerts, and treat a falling health factor as an early warning that demands action, not something to react to at the last moment.