Intermediate level
A DeFi loan is safe as long as its health factor stays above 1. Health factor is your collateral value times its liquidation threshold divided by your debt, so it falls when collateral drops, when volatile debt rises, and slowly as interest accrues. Know your liquidation price, keep a band you act on, and remember that repaying debt raises the health factor more per dollar than adding collateral does.
How the ratios fit together
The beginner guide to lending and borrowing introduced loan to value, liquidation threshold, health factor and the liquidation penalty. To run a loan you need to see them as one system, because every interface shows them slightly differently.
Here are the parameters for ETH on Aave v3’s main Ethereum market as of September 2026. Other markets and other assets differ, and governance can change them, so read the parameters of the market you are actually in.
| Parameter | ETH (WETH) on Aave v3 Ethereum | What it controls |
|---|---|---|
| Maximum LTV | 80.5% | How much you may borrow when you open or add to the loan |
| Liquidation threshold | 83% | The line at which liquidators may step in |
| Liquidation bonus | 5% | The discount liquidators receive on your collateral |
Now a position, with an illustrative price. You deposit 5 ETH at $3,000, worth $15,000, and borrow $6,000 of USDC. Your current LTV is 40%, so your health factor is 0.83 ÷ 0.40 = 2.08. The interface may also show borrow power used, here $6,000 ÷ ($15,000 × 0.805) ≈ 50%. Borrow the full 80.5% and your health factor starts at 1.03, about 3% from liquidation on day one.
With stablecoin debt against one volatile asset, the health factor translates directly into the price fall you can survive:
| Health factor | Fall that liquidates you |
|---|---|
| 1.1 | 9.1% |
| 1.25 | 20% |
| 1.5 | 33% |
| 2.0 | 50% |
| 3.0 | 67% |
Your liquidation price, and the two ways to move it
For the position above that is $6,000 ÷ (5 × 0.83) ≈ $1,446, a fall of about 52%. When the market moves toward that number you have two levers: repay some debt or add collateral. Here is what $1,500 does through each:
| Action | Health factor | Liquidation price | Fall needed |
|---|---|---|---|
| Starting position | 2.08 | $1,446 | 52% |
| Repay $1,500 of debt | 2.77 | $1,084 | 64% |
| Add $1,500 of ETH (0.5 ETH) | 2.28 | $1,314 | 56% |
Repaying wins, and that is not a coincidence. Dollar for dollar, repaying debt raises the health factor more than adding collateral whenever the collateral is worth more than the debt, which is true of every loan that has not already failed. Adding more of the same asset also adds exposure to the thing that is falling. The catch is that repaying needs stablecoins on hand, while a top up can use what you already hold. Keep the option open by keeping some of the borrowed asset within reach.
What a liquidation actually takes
Liquidation is not all or nothing, and the rules vary by protocol version. On Aave v3, a liquidator may repay up to 50% of a debt while the health factor is above 0.95 and both collateral and debt are worth at least $2,000, and up to 100% once the health factor is 0.95 or lower. They receive collateral worth the debt they repaid plus the bonus.
Say ETH falls to $1,440 and the health factor slips to 0.996. A liquidator repays $3,000 of your USDC debt and takes $3,150 of ETH, which is 2.1875 ETH. You are left with 2.8125 ETH and $3,000 of debt at a health factor of 1.12. The direct cost is $150, but the larger cost is that nearly half your ETH was sold at the low for you. The rest of the loan is still open, and a further fall can trigger another round.
Aave V4, live on Ethereum since March 30, 2026, changes the recipe: a liquidator repays only enough to bring the position back to a target health factor set per market, and the bonus grows the lower the health factor falls, like a Dutch auction. The V4 liquidation write up explains why that liquidates less of each borrower. Other lending protocols have their own rules. Read them for the market you use, and see inside a lending protocol for how liquidators operate.
Variable rates: utilization sets your bill
Borrow rates on pooled lending markets follow a kinked curve. Below a target utilization, the share of the pool that is lent out, the rate rises gently. Above it, the rate climbs steeply to pull borrowers out and let lenders withdraw.
For USDC on Aave v3’s main Ethereum market as of September 2026, the kink sits at 94% utilization, the rate at the kink is 4.4%, and at 100% it reaches 14.4%:
| Utilization | Borrow rate |
|---|---|
| 50% | 2.34% |
| 80% | 3.74% |
| 94% (the kink) | 4.40% |
| 97% | 9.40% |
| 99% | 12.73% |
| 100% | 14.40% |
Interest accrues every second and compounds into your debt, so your health factor drifts down even when prices do not move. The $6,000 loan above at about 4.3% becomes roughly $6,264 after a year, and its health factor slides from 2.08 to 1.99 with ETH flat. The real danger of high utilization is not the rate but the exit: at 100%, lenders cannot withdraw and borrowers who want to unwind may not find the liquidity. After the April 2026 rsETH exploit, Aave froze the affected markets within hours and cut the WETH rate curve on several markets within two days. Rates and rules can change while your loan is open.
Stablecoin debt vs volatile debt
What you borrow decides what can hurt you.
Stablecoin debt
Borrow USDC against ETH
- Your debt stays fixed in dollars, apart from interest
- Only the collateral price moves the health factor, so the liquidation price is easy to reason about
- A falling market is exactly when you get close to liquidation
- A depeg of the borrowed stablecoin changes the picture in either direction
Volatile debt
Borrow ETH against USDC
- This is a short position: the loan gets worse as ETH rises
- The debt can grow without limit in dollar terms, while the collateral cannot
- A falling market improves your position
- Borrowing an asset against a correlated one, such as ETH against wstETH, cancels most price risk
A worked short: $10,000 of USDC as collateral (78% liquidation threshold on Aave v3’s main Ethereum market as of September 2026) and 2 ETH borrowed at $3,000. The health factor is $7,800 ÷ $6,000 = 1.3, and you are liquidated if ETH rises to $3,900, only 30% higher. Correlated borrowing is the basis of looping, covered in liquid staking tokens in practice.
Efficiency mode for correlated assets
When collateral and debt move together, a protocol can afford to lend much more against them. Aave calls this efficiency mode, or e-mode: you opt into a category such as ETH correlated assets, and you may then only borrow assets in that category.
| wstETH as collateral | Standard | ETH correlated e-mode |
|---|---|---|
| Maximum LTV | 78.5% | 93% |
| Liquidation threshold | 81% | 95% |
| Liquidation bonus | 6% | 1% |
| Maximum theoretical leverage | About 4.7 times | About 14 times |
Figures for Aave v3’s main Ethereum market as of September 2026. The bonus is smaller because a liquidator seizing wstETH to cover ETH debt takes little price risk. What e-mode removes is exposure to the price of ETH. What it keeps is exposure to anything that separates the two assets: the exchange rate the oracle reports, a market depeg if the oracle uses market prices, and the spread between borrow and staking rates. With a 95% threshold, the room for those to go wrong is small. An oracle error in March 2026 shows how little room that leaves; see liquid staking tokens in practice. Aave V4 keeps the idea through dedicated e-mode spokes.
A routine that keeps you in control
Set your bands before you borrow
Pick three health factors and write them down: a comfortable target, a level where you act, and an emergency level. For example 2.0, 1.6 and 1.3 on volatile collateral. Tie each to a price with the formula above.
Put alerts on more than one channel
Dashboards and notification bots can watch your address and message you when the health factor crosses a level. Use two, so a missed notification is not the end of the story. Our liquidation calculator gives you the prices to set.
Keep dry powder where it can be used
Stablecoins to repay with, on the same chain, plus gas. Gas spikes during crashes, and bridging in a hurry is how people run out of time.
Rehearse the repayment
Do a small repayment when nothing is happening, so the approval is in place and you know the screens. Partial repayment is allowed at any time on the major protocols.
Check after big moves and on a schedule
Look after any large market move and weekly regardless, because interest accrues and governance can change parameters. Automation tools that deleverage for you exist, and they are another contract with its own risk.
What a cascade looks like
Liquidations are not independent events. A sharp drop pushes the lowest health factors under 1. Liquidators seize that collateral at a discount and usually sell it straight into DEX pools to lock in the bonus. That selling pushes the price lower still, which reaches the next band of positions, and so on. Meanwhile gas rises as bots compete, making top ups expensive exactly when they matter, and stablecoin borrowing demand pushes utilization toward the steep part of the curve.
The practical lesson is to size for the drop plus the cascade. If ETH has fallen 30% in a day before, a health factor that survives exactly 30% is not enough, because the liquidations of everyone closer to the edge arrive in the same hours. The beginner guide’s point stands: calculate the liquidation price before you borrow, and ask whether you have seen that move happen.
Common questions
What health factor should I keep?
There is no universal number, because it depends on how volatile the collateral is and how quickly you can react. Work backward from the price fall you want to survive: the fall to liquidation is 1 minus 1 divided by the health factor, so 1.5 survives about 33% and 2.0 about 50%, before interest and any cascade.
Is it better to repay debt or add collateral?
Per dollar, repaying raises the health factor more whenever your collateral is worth more than your debt, which is true of every healthy loan. Adding more of the same asset also increases your exposure to it. Adding collateral is still useful when it is all you have on hand.
Why did my health factor fall when prices did not move?
Interest accrues continuously and adds to your debt. Governance can also lower a liquidation threshold, and for collateral like liquid staking tokens the oracle’s exchange rate can move independently of the market price you watch.
Can I be liquidated in e-mode if ETH crashes?
Not by the ETH price alone, if both collateral and debt are ETH correlated, because they fall together. You can still be liquidated by an oracle problem, a depeg of the collateral in a market that prices it by market value, or interest accrual. The high threshold leaves very little room for any of them.
What happens to my loan if the protocol freezes an asset?
A freeze usually stops new deposits and borrowing of that asset while repayment and liquidation keep working. Your loan stays open under the same rules, but you may not be able to add to it or unwind it the way you planned, which is why keeping repayment funds on hand matters.
Where to go next
Next: Choosing a stablecoin: backing, redemption and risk
Guide 11 of 16 in the Intermediate level. Your place is kept on this device, so you can pick up exactly here next time.