The health factor is a critical metric used by decentralized lending protocols to assess the safety margin of a user’s collateralized position. It provides a real-time indication of how close a loan is to being liquidated, with a value greater than one signifying a healthy position. A health factor of exactly one indicates that the collateral value equals the liquidation threshold.
Calculation
The calculation involves comparing the total value of the collateral, adjusted by its collateral factor, against the total value of the borrowed assets plus accrued interest. The formula typically divides the collateral value by the borrowed value, where the collateral value is adjusted by the collateral factor. This calculation provides a single, quantifiable measure of risk exposure for the borrower.
Consequence
When the health factor drops below one, the position becomes eligible for liquidation, where a portion of the collateral is sold to repay the debt. This automated consequence protects the protocol’s solvency by ensuring that loans are closed before the collateral value falls below the outstanding debt. Monitoring the health factor is essential for borrowers to manage their risk and avoid forced liquidations.
Meaning ⎊ Systemic Solvency Thresholds act as critical algorithmic boundaries that initiate automated liquidations to maintain protocol stability during volatility.
