Protect your capital from liquidation
The Health Factor is the numeric representation of the safety of your deposited assets weighted against any borrowed assets and their underlying value. The higher the Health Factor value is, the safer the state of your funds is against a potential liquidation.
If the Health Factor is reduced to 1 or lower, liquidation will be triggered. In a liquidation, up to 50% of the borrowing debt is repaid and that value plus the liquidation fee is taken from the collateral available. After a liquidation, that amount liquidated from your debt is repaid.
The Health Factor depends on the liquidation threshold of your collateral against the value of your borrowed funds. You can find the collateral parameters from the Markets page by selecting the desired asset to view the Reserve Status & Configuration.
The Health Factor will increase or decrease depending on the fluctuation in the underlying token value of your deposits.
For example, If you deposit BTC as collateral and use that to borrow USDC, should the value of BTC drop due to market conditions, the underlying value of your collateral will also decrease in accordance. This would negatively impact your Health Factor and increase the risk of liquidation.
If you maintain a strong Health Factor, it affords you portfolio flexibility in two ways:
- 1.Decreased likelihood of liquidation, particularly when fluctuating assets are used as collateral (low-risk strategy)
- 2.Improves borrowing eligibility in order to leverage more collateral (high-risk strategy)