How safe is a health factor of 1.33?
Borrow against collateral on a DeFi lending service and you will see a figure such as a health factor of 1.33. If it drops below 1, others can liquidate the loan, repaying part of the debt and taking collateral at a discount. But 1.33 does not mean the collateral can fall 33% safely.
This guide shows with a hypothetical calculation how the health factor is computed and how far collateral prices can fall before liquidation. It also covers how much collateral a liquidation takes, how accruing interest lowers the health factor over time, and what to check before borrowing.
The health factor formula
Aave's help page on health factor and liquidations explains that the health factor equals collateral value multiplied by each asset's liquidation threshold, divided by the value of the debt. The liquidation threshold is the share of collateral value that borrowing may reach before liquidation, and it differs by asset. Below a health factor of 1, the loan can be liquidated.
A related figure is the loan-to-value ratio, or LTV, the maximum share you can borrow initially. The liquidation threshold is set slightly higher. Borrowing the maximum therefore starts the loan close to a health factor of 1.
Price declines and the liquidation point
The table calculates how the health factor changes as collateral falls for a hypothetical loan with $1,000 of collateral, $600 of debt, and an 80% liquidation threshold. The debt is assumed to be a stablecoin whose price does not change.
| Collateral price change | Collateral value | Collateral × threshold | Health factor | Status |
|---|---|---|---|---|
| None | $1,000 | $800 | 1.33 | Safe |
| Down 15% | $850 | $680 | 1.13 | Cushion shrinking |
| Down 25% | $750 | $600 | 1.00 | Liquidation line |
| Down 30% | $700 | $560 | 0.93 | Liquidatable |
A health factor of 1.33 means the loan reaches the liquidation line after a 25% fall, not 33%. The liquidation price is debt ÷ threshold = 600 ÷ 0.8 = $750.
When liquidation happens
A liquidator repays part of the debt and receives collateral worth that amount plus a liquidation bonus. In the 30% decline case, suppose a liquidator repays $300 of debt with a 5% bonus; $315 of collateral changes hands. Collateral falls to $385, debt to $300, and the health factor returns to (385 × 0.8) ÷ 300 ≈ 1.03.
The borrower loses $15 to the bonus. How much debt can be repaid at once and the size of the bonus vary by protocol and asset, and a deeply underwater loan may be liquidated more heavily in one go. In fast markets, liquidations can repeat.
Interest and oracles
Even with stable prices, the health factor drifts down because interest accrues on the debt. At 5% a year, debt grows from $600 to $630 after a year, and with unchanged collateral the health factor falls to 800 ÷ 630 ≈ 1.27. The longer a loan stays open, the more accrued interest matters.
Prices in the calculation come from the protocol's oracle. As Aave's risk documentation notes, if oracle prices briefly differ from exchange prices or updates lag, the price you see and the price the liquidation logic uses can diverge. Thin market liquidity can also mean collateral is sold at poor prices during liquidation.
Checks before borrowing
Before using a DeFi loan, work through these items.
- Find each collateral asset's LTV, liquidation threshold, and liquidation bonus in the official documentation.
- Calculate the liquidation price as debt ÷ threshold and note how far the current price is from it in percent.
- Check whether the borrowing rate is fixed or variable and how much accrued interest would lower the health factor.
- Identify the oracle the protocol uses and how its prices update.
- Decide in advance how you would add collateral or repay debt in a sharp drop, and how long that would take.
Protocol risks
As Ethereum.org's DeFi overview explains, DeFi lending runs on smart contracts rather than banks, which brings risks such as contract bugs, oracle errors, and parameter changes through governance. If governance changes a liquidation threshold or which assets count as collateral, the same loan's health factor can shift suddenly.
When both collateral and debt are volatile assets, the calculation is more complex. If collateral falls while the borrowed asset rises, the health factor drops from both directions at once.
Some interfaces let you set alerts at a chosen health factor, such as 1.2, so you have time to act before the liquidation line. An alert does not move funds by itself, so it helps only if you can respond in time.
Limits of the calculation
The prices, ratios, and bonus here are hypothetical. Real protocols may mix several collateral types or apply special modes with different parameters, changing the calculation.
When borrowing, check the current documentation and on-screen values of a protocol such as Aave with their dates. This guide does not recommend using any protocol or trading any asset.