Health factor is a lending-protocol metric that compares liquidation-adjusted collateral value with outstanding debt. It helps show a borrowing position’s distance from the protocol’s liquidation boundary, rather than predicting an investment return.
An Aave-style calculation
In Aave’s documented model, health factor equals total collateral value multiplied by the weighted-average liquidation threshold, divided by total debt value. Equivalently, each eligible collateral value is multiplied by its applicable threshold before the amounts are added and divided by debt.
Assume one collateral asset worth $1,000, a hypothetical liquidation threshold of 80%, and debt worth $500. With fees, interest changes and price movements excluded, the health factor is 1,000 × 0.80 ÷ 500 = 1.6. These are illustrative values, not current market parameters.
What changes the result
A health factor below 1 makes an Aave position eligible for liquidation. This convention should not be assumed for every platform’s similarly named indicator. Asset-price changes, accruing debt interest, collateral withdrawals and risk-parameter updates can change the result.
A higher reading generally indicates more room before liquidation under the same assumptions, but no value guarantees safety. Correlated collateral and debt prices, oracle limitations and abrupt market moves matter. The metric does not measure smart-contract security or the ease of selling collateral during stress.