Health Factor Optimization

Health factor optimization is the process of managing a borrower's position to ensure it remains safely above the liquidation threshold while maximizing leverage or yield. The health factor is a numerical representation of the safety of a loan, calculated as the ratio of the collateral value to the borrowed value, adjusted by liquidation thresholds.

Borrowers optimize this by adding more collateral, paying down debt, or shifting assets to higher-yielding strategies. This requires constant monitoring and active management, often using automated bots or scripts.

If the health factor drops too low, the position is at immediate risk of being liquidated by the protocol. Successful optimization balances the desire for high returns with the necessity of avoiding forced liquidations.

It is a critical skill for active participants in DeFi. It involves understanding the volatility of the underlying assets.