What are collateral and health factor in DeFi?

Collateral is an asset supplied to support a borrowing obligation. In Aave, health factor is the value of collateral weighted by liquidation thresholds, divided by total debt. With several collateral assets, each value is weighted separately before the results are added.

A reading below 1 makes a position eligible for liquidation. A reading above 1 is not zero risk. Interest, collateral prices and the value of the borrowed asset can change the ratio. Not every DeFi protocol uses the same name or calculation rules.

Example

Suppose Jordan has one collateral asset worth $2,000 and debt of $1,000. With a hypothetical 80% liquidation threshold, health factor is 2,000 × 0.80 ÷ 1,000 = 1.60. If collateral falls to $1,500 while debt stays unchanged, the ratio falls to 1.20. With the same threshold and assumptions, $1,250 of collateral corresponds to the boundary of 1.

Maximum LTV for new borrowing and the liquidation threshold are different measures. Modes such as E-Mode may change the applicable settings. Check the position’s inputs instead of assuming a universally safe ratio.

The collateral-monitoring guide compares stress scenarios and repayment options. The liquidation entry explains what forced settlement means.