Health Factor

What is Health Factor

A user's health factor serves as a gauge for the safety buffer of a user's loan position. This metric is expressed as a numerical value of a user's collateral assets against their borrowed assets.

It is calculated by dividing the aggregate value of the collateral by the sum of the borrowed amounts, adjusted for the collateral's specific liquidation thresholds (or collateral ratio). These thresholds are critical as they define the minimum health factor a user must maintain to prevent their position from being liquidated.

Example

• User has $100 BTC (80% liquidation threshold) and $100 ETH (70% liquidation threshold) supplied as collateral

• User has $80 USDC borrowed

• Health factor = weighted average collateral liquidation value / value of loan

• Health factor = ($100 * 80% + $100 * 70%) / $80 = 1.875

A decrease in the health factor below the set threshold signals an increased risk of liquidation, prompting the need for users to either augment their collateral or reduce their debt to safeguard their positions.

If a user's health factor falls below 1, their collateral will be subject to liquidation to repay their loan, bringing back their health factor to > 1.