Loan Health

Loan health is a metric used in decentralized finance lending protocols to determine the risk of a borrower's position being liquidated. It is calculated by comparing the total value of the collateral provided by the borrower against the value of the debt they have borrowed, adjusted for the liquidation threshold of the specific assets involved.

When a borrower's loan health score drops toward a critical level, the protocol identifies the position as under-collateralized. This triggers automated liquidation mechanisms designed to sell off the collateral to repay the debt, thereby protecting the protocol from insolvency.

High loan health indicates a safe buffer, while low loan health signals imminent risk of forced asset sale. Monitoring this metric is essential for participants using leveraged positions in crypto lending markets.

It reflects the intersection of collateral volatility and debt accumulation. Effectively, it acts as a real-time safety gauge for systemic risk within lending pools.

Maintaining high loan health requires active management of collateral ratios.