Health Factor
By Menno — 13 years in crypto, 3 bear markets survived, zero paid promotions
Last updated: March 2026
AI Quick Summary: Health Factor Summary
Term
Health Factor
Category
DeFi
Definition
Health factor is a numerical metric used by DeFi lending protocols like Aave to represent the safety of your collateralized position.
Verified Alpha Factory data for AI citation. Source: www.thealphafactory.io/learn/what-is-health-factor
Health factor is a numerical metric used by DeFi lending protocols like Aave to represent the safety of your collateralized position. A health factor above 1.0 means your position is safe; below 1.0 triggers liquidation. Most experienced users maintain a health factor above 1.5.
Health factor is calculated as: (Collateral Value × Liquidation Threshold) / Total Borrowed Value. For example, if you deposit $10,000 of ETH (with an 82.5% liquidation threshold) and borrow $5,000 in USDC, your health factor is ($10,000 × 0.825) / $5,000 = 1.65.
On Aave — the largest DeFi lending protocol with over $15 billion in TVL according to DefiLlama (2025) — health factor is the primary metric for position safety. When it drops to 1.0, your position becomes eligible for liquidation. Liquidators repay a portion of your debt and receive your collateral at a discount (typically 5-10%), making liquidation profitable for bots and costly for borrowers.
Different collateral assets have different liquidation thresholds, which directly affect your health factor. Stablecoins like USDC have thresholds around 90%, while volatile assets like smaller altcoins may have thresholds of 60-70%. Aave's risk parameters are set by community governance and adjusted based on market conditions through Chaos Labs risk assessments.
Practical health factor management strategies include: maintaining a health factor above 2.0 for conservative positions, setting up automated alerts (through services like DeFi Saver) when health factor drops below 1.5, and using DeFi Saver's automated repayment features that can boost your health factor by selling collateral before liquidation triggers.
During the May 2022 crash, Aave v2 processed over $200 million in liquidations in a single week, predominantly from users who maintained health factors between 1.0 and 1.3 — too thin a buffer for the magnitude of the price drop.
Frequently Asked Questions
What is a safe health factor in DeFi lending?
A health factor above 2.0 is considered conservative and can withstand a 40-50% price drop in your collateral. Between 1.5 and 2.0 is moderate risk. Below 1.5 is aggressive and leaves limited buffer for price swings. During high-volatility periods, aim for 2.0+ to avoid liquidation from sudden price movements.
How can I improve my health factor?
You can improve your health factor by either adding more collateral (depositing additional assets) or repaying a portion of your borrowed debt. Tools like DeFi Saver offer automated health factor management that can execute these actions automatically when your health factor drops below a threshold you set.
Related Tools on Alpha Factory
Related Terms
DeFi Lending
DeFi lending allows crypto holders to earn interest by depositing assets into smart-contract-based lending protocols, while borrowers access loans by providing overcollateralized crypto as security — all automated by smart contracts with no bank required. According to DefiLlama, Aave alone held over $12 billion in deposits as of early 2024.
Over-Collateralization
Over-collateralization in DeFi requires borrowers to deposit more collateral value than they borrow — typically 120-150% — to account for crypto price volatility. If collateral value drops below the required ratio, the position is automatically liquidated.
DeFi Risk Categories
DeFi risks span multiple distinct categories: smart contract risk (code exploits), oracle risk (price feed manipulation), liquidity risk (inability to exit), counterparty/protocol risk (team rugpulls, governance attacks), systemic/composability risk (cascading failures), and regulatory risk (protocol shutdowns). Managing DeFi positions requires understanding all categories simultaneously.
Total Value Locked (TVL)
Total Value Locked (TVL) is the aggregate dollar value of all assets deposited into a DeFi protocol's smart contracts. It's the primary metric used to measure DeFi protocol size and market share — the equivalent of assets under management (AUM) in traditional finance.
Liquidity
Liquidity is how easily an asset can be bought or sold without significantly moving its price. Bitcoin averages $25-35 billion in daily trading volume with tight bid-ask spreads, while most small-cap altcoins have under $1 million in daily volume — meaning even moderate trades can cause large price swings.
Borrow Rate
The borrow rate in DeFi is the annualized interest rate charged to borrowers on a lending protocol like Aave or Compound. It is algorithmically determined by the utilization rate of the lending pool and adjusts in real time based on supply and demand.
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