What is Health Factor (DeFi)

The Health Factor (HF) is a numerical score used by Aave and similar DeFi lending protocols to measure how safe a borrowing position is from liquidation — a single number that summarises the relationship between the value of deposited collateral and the amount borrowed, adjusted for the liquidation thresholds of each asset. HEALTH FACTOR FORMULA Health Factor = (Σ Collateral × Liquidation Threshold) / Total Debt Value Example: You deposit 1 ETH ($3,000) with a liquidation threshold of 82.5%, and borrow $1,500 USDC. HF = ($3,000 × 0.825) / $1,500 = $2,475 / $1,500 = 1.65. INTERPRETING HEALTH FACTOR VALUES HF > 1.0: Position is safe — collateral value exceeds the liquidation threshold. HF = 1.0: Liquidation trigger — the protocol initiates automatic liquidation of your collateral. HF < 1.0: Already being liquidated (in practice the protocol acts exactly at 1.0). HF > 2.0: Comfortable safety buffer. HF > 3.0: Conservative position, significant collateral buffer. WHAT HAPPENS AT LIQUIDATION When HF drops to 1.0, external liquidators (bots and arbitrageurs monitoring Aave) can repay a portion of your debt (up to 50%) and receive your collateral at a discount: Close factor: Up to 50% of debt can be repaid per liquidation. Liquidation bonus: Liquidators receive 5-15% bonus on the collateral they claim (asset-dependent). Result: You lose collateral worth more than your debt repaid, plus the liquidation bonus. Net loss: Typically 5-15% of your position value, plus the debt you still owe. HOW TO MONITOR AND MANAGE HEALTH FACTOR Aave provides real-time HF display in the app. Third-party monitoring: DeFiSaver (defiSaver.com) — automated position management, will add collateral or repay debt automatically if HF falls below your set threshold. Instadapp — similar automation for Maker/Aave positions. Price alerts: Set alerts (via CoinMarketCap app, Blockfolio) when your collateral asset reaches the price at which HF would fall to 1.5 — giving time to react. India context: Automated position protection via DeFiSaver is particularly valuable for Indian users in different time zones from UTC peak trading activity.

Terms in addition to the Health Factor (DeFi)

Blockchain

A blockchain is a subset of a distributed database. The Bitcoin inventors originally prototyped the system in 2008. This modern database is made up of separate blocks that are connected together in a chronological chain. Blockchains may be used to store a wide range of data types. It has mostly been utilized as a public ledger for bitcoin transactions to date. A peer-to-peer network comprised of independent nodes uses a consensus process to ensure the blockchain's security and legitimacy. Each node in the network keeps a public and immutable copy of the data.

2 Factor Authentication (2FA)

2 Factor Authentication is a security measure with two layers. It is used by the majority of cryptocurrency exchanges. To log in, you must provide not only a password, but also a code obtained, for example, from the Google authenticator.

Airdrop

An airdrop is a method of distributing coins. End users can typically obtain coins for free or in exchange for doing a small task, such as subscribing to a newsletter, sending a tweet, or inviting others via a personal affiliate link. Cryptocurrency airdrops — the act of depositing cryptocurrency into public crypto wallets — are utilized as a marketing, liquidity creation, and network bootstrapping technique for many different types of blockchain initiatives.

Altcoin

Altcoin - "alternative coin" - is any kind of digital currency other than Bitcoin. Since the launch of Bitcoin, the world's first digital currency, many altcoins (as well as supporting blockchains) have been created. Altcoin digital currencies share many similarities to Bitcoin, but consistently and have significant differences. There are about 20,000 altcoins, and this number is expected to grow significantly in the coming years. Altcoins often develop Bitcoin features. Ethereum, currently the most widely used blockchain, supports digital contracts and separate applications where Bitcoin does not. Altcoins are also often created to cater to the needs of different users. The Litecoin blockchain, for example, can process payments quarterly for the duration of Bitcoin.

Cold Storage

Cold storage is the way to store cryptocurrency offline. The word refers to the use of offline wallets that are not connected to the internet. Cold storage is the most secure way to keep cryptocurrencies since an offline currency becomes less likely to be hacked and stolen. Paper wallets, printed renditions of private keys, and offline hardware and software wallets are all examples of cold storage.