A liquidation health factor is one ratio that tells a lending market whether your debt is still covered by enough collateral. It is built from three inputs: the value of the collateral, the market’s liquidation threshold, and the size of the debt. Nothing else enters the formula — not your intentions, not your history, not the price shown on a decentralised exchange.
Most first-year borrowers meet the liquidation health factor only after it has already dropped below 1, which is the worst possible time to learn how it works. This piece walks through the ratio, then a liquidation price calculation from collateral, loan and threshold using a clearly labelled illustrative position, so the mechanics are visible before anything is at stake.
- The threshold belongs to the market, not to you. It is set per asset and per pool, and it can change while your loan is open.
- The ratio falls for two reasons. Collateral gets cheaper, or debt gets bigger through accrued interest. Both push you toward the same line.
- Liquidation is usually partial and always penalised. A liquidator repays part of the debt and takes collateral worth more than they repaid.
- Only the oracle price triggers anything. A better price on a single venue does not protect a position the protocol values differently.
What the liquidation health factor measures
The ratio compares the borrowable value of your collateral against your debt, and the position is liquidatable when it falls below 1. It is a buffer measurement, not a score. A health factor of 1.30 means the collateral could lose roughly 23% of its value before the buffer is gone, which is a more useful way to read it than the number itself.
The numerator: collateral times threshold
The market assigns each collateral asset a liquidation threshold, expressed as a percentage of its value that counts toward solvency. A threshold of 80% means only $800 of every $1,000 of collateral is treated as backing your debt. The remaining 20% is the market’s cushion against the cost of auctioning collateral quickly.
This is the number people confuse with maximum loan-to-value. The maximum LTV caps what you may borrow when you open the position. The threshold decides when the position may be closed. The distance between them is the buffer, and it is the only reason a position does not die the moment it is opened.
The denominator: debt, including interest
Debt grows even when the collateral does not. Interest accrues per block or per second depending on the market, and it is added to the balance you owe. A position that is comfortable today can drift toward the line over months of doing nothing at all.
That drift is why a health factor is not a static property of the deposit. It is a function of time as well as price, and only one of those two variables is visible on a chart.
The parameters that feed the ratio are set per market, which is why the same collateral can behave differently in two places. The table below is a map of what each setting controls.
| Parameter | What it controls | Who sets it |
|---|---|---|
| Maximum LTV | How much you may borrow when opening the position | The market, per collateral asset |
| Liquidation threshold | The point at which the position becomes closable | The market, per collateral asset |
| Liquidation bonus | How much extra collateral the liquidator receives | The market, often tiered by asset risk |
| Close factor | How much of the debt one liquidation may repay | The market, sometimes per position size |
| Oracle feed | The only price used in every calculation above | The market, per asset and per deployment |
A liquidation price from collateral, loan and threshold
The liquidation price is the collateral price at which the numerator and denominator meet. Take an illustrative position: 10 ETH of collateral at $2,000, a market liquidation threshold of 80%, a maximum LTV of 75%, and a 12,000 USDC loan.
The loan is 60% of the collateral value, comfortably under the 75% cap, and the health factor is 20,000 multiplied by 0.80, divided by 12,000, which is 1.33. The liquidation price is the loan divided by the collateral quantity times the threshold, so 12,000 divided by 8, which is $1,500.
| ETH price | Collateral value | Borrowing power at 80% | Health factor | State |
|---|---|---|---|---|
| $2,400 | $24,000 | $19,200 | 1.60 | Comfortable |
| $2,000 | $20,000 | $16,000 | 1.33 | As opened |
| $1,750 | $17,500 | $14,000 | 1.17 | Buffer thinning |
| $1,600 | $16,000 | $12,800 | 1.07 | One bad candle away |
| $1,500 | $15,000 | $12,000 | 1.00 | The line |
| $1,400 | $14,000 | $11,200 | 0.93 | Liquidatable |
Now add twelve months of interest at an illustrative 5% on the debt, with the collateral price unchanged. The debt becomes 12,600 and the liquidation price becomes 12,600 divided by 8, or $1,575. The collateral never moved, and the position still became easier to liquidate.
This is the single most underrated part of the mechanic. Time alone moves the line toward you, and it does so quietly, without a candle on any chart.
What a liquidation actually does
Liquidation is normally partial, penalised, and open to anyone. A keeper repays a portion of your debt — often capped by a close factor set per market — and receives collateral worth slightly more than the repayment. The surplus is the incentive that keeps the mechanism running without a help desk.
Continue the example at an ETH price of $1,450, where the health factor is 0.967. An illustrative close factor of 50% lets a liquidator repay 6,000 USDC and take 6,480 of collateral at an 8% bonus, which is 4.469 ETH. You are left with 5.531 ETH worth $8,020 against 6,000 of debt, and a health factor of 1.07.
You did not lose everything. You lost 480 to the bonus, kept a smaller leveraged position, and the market is now further from your line than it was. That is the designed outcome. The undesigned outcome is a fast market where the price keeps falling while the transaction confirms, and the position arrives at the next block already under the line again.
Why the oracle price is the only price that matters
Every number above is computed from an oracle feed, not from the last trade on whichever venue you happen to watch. If the oracle says the collateral is worth $1,450, that is the value the contract uses, regardless of a better quote somewhere else.
Oracles create their own failure modes. A feed that updates too slowly can leave a position liquidatable at a price the market has already left behind. A feed that updates too fast, or one built from thin liquidity, can produce a wick that triggers liquidations nobody could have reacted to. Both directions of error cost borrowers money, and neither is visible in the interface’s health factor until it happens.
A liquidation price is not a prediction about the market. It is a statement about what one contract will do at one price, and the contract does not care whether you agree.
Repairing a low liquidation health factor
Repair means adding collateral or repaying debt, and both are harder in practice than they sound. The moment the ratio is low is usually the moment you are least able to move funds: gas is expensive, bridges are congested, and the stablecoin you need is on the wrong chain.
Why starting conservative is cheaper
A loan at 40% LTV has roughly twice the buffer of the same loan at 60%, and the cost of that safety is measured in forgone yield on the capital you did not borrow. That cost is fixed and known at the start. The cost of repairing a position under stress is neither fixed nor known.
Adding collateral later also tends to happen at the worst available price, because the reason you are adding is that the market has moved. Borrowing less at the start is the only version of this decision you get to make calmly.
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