Understanding Health Factor
The most important number in DeFi lending. Learn how to read it, calculate it, and stay safe from liquidation.
What is Health Factor?
Health Factor is a single number that tells you how safe your position is. Think of it as a safety score:
The rule is simple: When Health Factor drops below 1, your position gets liquidated. Your collateral is sold to repay your debt, and you lose a penalty (typically 5-10%).
The Formula
Let's break down each part:
- Collateral: The USD value of what you've deposited
- Liquidation Threshold: The percentage at which you get liquidated (varies by asset, typically 80-85%)
- Total Debt: The USD value of what you've borrowed (including interest)
Real Example
Let's say you:
- Deposit 10 ETH at $3,500 each = $35,000 collateral
- ETH has a Liquidation Threshold of 83%
- You borrow $20,000 USDC
A Health Factor of 1.45 means you're in the safe zone, but you should monitor it if ETH price drops.
What Causes Health Factor to Drop?
If your ETH collateral drops in value, your Health Factor drops proportionally.
Your borrowed amount grows over time as interest compounds. This slowly reduces Health Factor.
Taking on additional debt directly lowers your Health Factor.
How to Improve Health Factor
Add More Collateral
Deposit more assets to increase the numerator. Quickest way to improve HF.
Repay Some Debt
Pay back part of what you borrowed to reduce the denominator.
Recommended Health Factor Levels
| Strategy | Target HF | Risk Level |
|---|---|---|
| Conservative / Long-term Hold | 2.0+ | Very Safe |
| Moderate Leverage | 1.5-2.0 | Medium Risk |
| Aggressive Leverage | 1.2-1.5 | High Risk |
| Maximum Leverage | 1.0-1.2 | Extreme Risk |
Warning Signs
- • Health Factor drops below 1.5 - consider adding collateral
- • Large market volatility expected (earnings, macro events)
- • Your collateral asset is particularly volatile
- • You can't monitor your position for extended periods