Health Factor Liquidation: When Does a DeFi Loan Get Liquidated?

What Is Health Factor Liquidation, and Why Do DeFi Loans Need It?

On Aave, a health factor below 1 makes a loan eligible for liquidation. A liquidator can then repay part of the debt and take collateral, plus a bonus. How much can be repaid depends on the version, the health factor, and the size of the position.

Health factor liquidation is what keeps a DeFi loan backed by enough collateral. A borrower locks crypto, borrows against it, and the protocol tracks one number. Once that number slips under 1, the loan is no longer safely covered.

Suppliers earn DeFi lending yields from borrower interest. Borrowers carry the other side of the deal: a forced sale of collateral if the number falls too far. Last reviewed: November 2, 2026, against Aave and Compound documentation.

How Is the Aave-Health Factor Calculated With a Real Example?

Aave defines the number like this:

Health Factor = (Total Collateral Value × Weighted Average Liquidation Threshold) ÷ Total Borrow Value

The liquidation threshold is the share of collateral-value that counts against the debt. Aave-Governance sets it for each asset. “Weighted average” blends the thresholds when several assets back one loan.

Loan-to-value, or LTV, is a different thing. It is the borrowing limit, while the threshold sits higher and marks where liquidation becomes possible.

Aave’s own example is easy to follow. A borrower supplies $10,000 in ETH with an 80% threshold and borrows $6,000 in GHO. The math is 8,000 ÷ 6,000, so the health factor is 1.333.

GHO is Aave’s stablecoin. A look at how stablecoins work helps here, since the debt-is priced in dollars while the collateral moves with the market.

Does Liquidation Start Once the Health Factor Falls Below 1?

“Below 1” is the key phrase. At exactly 1, Aave’s condition is not met. The loan becomes eligible only once the number drops under it.

Eligible does not mean instant. Liquidations are permissionless, so any network participant can send the transaction. Someone has to spot the position first, and Aave-calls the process highly competitive.

Some liquidators use their own funds or bots, and some use flash loans. The basics of how flash loans work are simple: the money is borrowed and repaid inside one transaction. That cuts the upfront cost but guarantees nothing.

Aave’s official liquidation page confirms that a health factor under 1 means the collateral-no longer covers the borrowed amount. 

Collateral-is valued through price feeds called oracles, so a sharp price move can change eligibility fast. Aave also says no health factor is universally safe. A high number gives a buffer, not a promise.

How Much Debt-Can a Liquidator Repay in a Single Transaction?

Under Aave V3, the close factor depends on the health factor and the position size. It is the share of debt a liquidator can repay at once.

Take the $6,000 loan with a 50% close factor. A liquidator repays $3,000 and receives matching collateral-plus a liquidation bonus, which is the borrower’s cost.

The borrower still owes $3,000 before new interest, and the collateral-taken is worth more than $3,000. If the health factor stays under 1, another round can follow.

How Do Price Drops and Rising Interest Push Down a Health Factor?

Collateral-value and debt both move the number. The table uses the same loan, with an 80% threshold and a $6,000 debt.

The table assumes one collateral asset, a fixed threshold, a fixed debt, and no extra interest. Real positions often hold several assets, and oracle values keep changing.

Here, the loan reaches the line at $7,500, a 25% drop. That price is the liquidation price in plain terms.

Interest works the other way. It adds to the debt over time, so the health factor can fall even when prices stand still.

How Do Aave and Compound III Handle Liquidations Differently?

Compound III has no health factor. Each asset gets a borrow collateral-factor, which caps borrowing, and a higher liquidation collateral-factor. An account becomes liquidable once its balance passes the liquidation limit.

Any address can then call the absorb function. The protocol’s reserves repay the debt, and the protocol takes the collateral. The borrower receives the collateral’s value, minus the penalty, in the market’s base asset, and the debt is cleared. 

The caller can earn liquidator points but does not receive the collateral. Eligible buyers can later purchase protocol-held collateral at a discount.

The official Compound liquidation page covers each step.

What Do Aave and Compound Docs Reveal About Liquidation Risk?

The documents show a few clear signals. The stronger one is that the formulas are public, so any borrower can test them. The main concern is speed, since a sharp move can erase a buffer fast. 

The biggest unknown is timing. Eligibility is clear, but the exact moment of liquidation is not.

Aave V4 works differently. Instead of V3’s fixed close factor, repayment is sized around a target health factor that governance sets for each spoke. The liquidation bonus also varies and grows as the health factor falls. The Aave-V4 liquidation design explains the change.

Since these are V4 rules, borrowers should confirm which version and market they use.

How Can Borrowers Lower Their Liquidation Risk Before It Hits?

1. Borrow well below the limit, since a wider gap gives more room.

2. Add collateral or repay debt. Aave’s FAQ says repayments lift the health factor more than deposits by default.

3. Watch prices and interest, since both move the number.

4. Check each asset’s threshold before borrowing, because values differ.

5. Pick the debt asset with care. A stablecoin risk comparison shows how peg and collateral-risks differ.

Protocol news also appears on the official Aave X account. Fake accounts copy popular handles, so any post should be matched with the documentation before action is taken.

Conclusion: Watch the Health Factor Well Before the Market Moves

Health factor liquidation on Aave starts below 1, but the details decide the outcome: the V3 close factor, the position size, and the liquidation bonus. What stands out is how differently Compound III works. What stays unclear is the exact timing.

Borrowers should check the live health factor and current documentation before borrowing. Safe wallet habits matter too, and these crypto wallet safety tips start with never sharing a recovery phrase.

Disclaimer: This article is for general information and is not financial advice. Borrowing in DeFi is risky, and a protocol can change its rules at any time. Before any funds are borrowed or moved, each detail should be matched against the official documentation.