Health Factor Calculation

The Health Factor Calculation is a quantitative measure used by lending protocols to assess the risk of a user's position being liquidated. It is typically defined as the ratio of the total value of collateral to the total value of borrowed assets, adjusted for the liquidation threshold.

A health factor above one indicates that the position is over-collateralized, while a value below one signals that the position is under-collateralized and eligible for liquidation. This calculation is performed in real-time by smart contracts, using price feeds from oracles to ensure accuracy.

It is a fundamental mechanism for maintaining the solvency of the entire protocol. If the health factor drops too low, the liquidation logic is triggered to close the position and protect the protocol's assets.

Understanding this calculation is essential for users managing leveraged positions, as it helps them monitor their risk and avoid forced liquidations during market downturns.