Encyclopedia DeFi · Entry 62
Collateral and health factors: measuring a loan against its limits
In this article
At a glance
Key facts
| Fact | Detail | Source |
|---|---|---|
| Health factor | Threshold-weighted collateral value divided by debt value. | [1] |
| Eligibility | A health factor below one enables liquidation under the cited model. | [1] |
| Borrow limit | Borrow validation also uses loan-to-value and other market constraints. | [2] |
Work through the collateral buffer in one unit
With hypothetical collateral worth $2,000, an 80% liquidation threshold and debt worth $1,000, threshold-weighted collateral is $1,600 and the simplified health factor is 1,600/1,000, or 1.6. If collateral falls to $1,250 with debt unchanged, the ratio reaches 1.
Real calculations use the protocol’s prices, asset-specific weights, integer rounding and mode rules. Interest can increase the debt while no new borrowing occurs. Keep the initial borrowing LTV separate from the liquidation threshold, and do not describe the maximum permitted loan as a safety recommendation.
A position can change without a new loan
If that collateral value falls to 1,200 while debt remains 1,000, the health factor becomes 0.96. The calculation crosses below one even though the borrower did not submit another transaction. Growing interest or a rise in the borrowed asset’s price can also worsen it.
A price relationship that has held in the past may break. Two assets sharing a reference currency or underlying exposure need not remain perfectly correlated, particularly when one is a receipt, wrapper or bridged claim.
Borrowing capacity and liquidation are different checks
Loan-to-value settings limit how much a new borrowing operation can create. Liquidation thresholds determine the weighted collateral used for liquidation eligibility. Treating the two settings as interchangeable can misstate both available borrowing and the distance to liquidation.
Other rules can include reserve caps, isolated borrowing modes and asset restrictions. A correct health-factor calculation therefore does not prove that every proposed borrow or withdrawal is allowed.
Direct answers
Questions people ask
Is a health factor of two always safe?
No universal number guarantees future outcomes. Price moves, interest, oracle behavior and market changes can alter it. The factor is a model-specific measure of the current position against configured thresholds.
Inspect the evidence
The answer and key facts have stable claim links. These records retain the scope and qualification when reused.
Collateral secures a loan under a market’s rules. Aave’s health factor divides threshold-weighted collateral value by debt value; below one, a position is eligible for liquidation. The liquidation threshold is distinct from the initial borrowing limit, and neither a high value nor price correlation guarantees future solvency.
Scope: DeFi. Verification: verified · 2026-10-02T18:17:57.897Z.
Link to this claimHealth factor: Threshold-weighted collateral value divided by debt value.
Scope: DeFi. Verification: verified · 2026-10-02T18:17:57.897Z.
Link to this claimEligibility: A health factor below one enables liquidation under the cited model.
Scope: DeFi. Verification: verified · 2026-10-02T18:17:57.897Z.
Link to this claimBorrow limit: Borrow validation also uses loan-to-value and other market constraints.
Scope: DeFi. Verification: verified · 2026-10-02T18:17:57.897Z.
Link to this claimRevision history
- — First publication after primary-source research and independent automated verification.
- — Expanded explanation: Work through the collateral buffer in one unit. Worked examples are illustrative; source checks and independent verification are recorded separately.
Source register
Sources and references
Retrieval dates and locators are recorded individually.- Health Factor & LiquidationsAave
Weighted liquidation thresholds and eligibility below health factor one.
Locator: Health Factor; Managing Health Factor; Liquidation Process · Retrieved: 2026-10-02Open source - Aave V3 PoolAave
Pool operations, collateral restrictions and liquidation settlement.
Locator: supply; withdraw; borrow; repay; liquidationCall · Version / scope: Aave V3 · Retrieved: 2026-10-02Open source - ReserveAave
Reserve LTV, liquidation threshold, borrow availability, caps and rate parameters.
Locator: Key Reserve Parameters; Dynamic Parameters and Governance · Version / scope: Aave V3 documentation · Retrieved: 2026-10-02T17:03:44.647ZOpen source
Research and drafting use AI assistance. A separate automated review checks claims against primary sources; no external expert or named human review is implied. Publication, substantive editing, source retrieval and verification are recorded separately. This version was independently checked by an automated reviewer on 2 October 2026.
Editorial method and correctionsDegrees of Satoshi editorial project. “Collateral and health factors: measuring a loan against its limits.” Published 2026-10-02; updated 2026-10-02. https://degreesofsatoshi.com/encyclopedia/collateral-and-health-factors/