Health Factor

The health factor is a numerical representation of the safety of a loan position within a decentralized lending protocol. It is calculated by dividing the total collateral value adjusted for liquidation thresholds by the total borrowed debt value.

A health factor above one indicates that the loan is currently safe and not at risk of immediate liquidation. As the factor approaches one, the position becomes increasingly vulnerable to market volatility.

If the factor falls below one, the smart contract allows third parties to liquidate the collateral to recover the debt. Monitoring the health factor is the primary way borrowers manage their risk and avoid losing their assets.

It is a real-time indicator of how close a position is to the protocol's safety limits.