Health factor & LTV calculator — Aave, Compound, Spark

Health factor is the most compact way to read liquidation risk in overcollateralized DeFi lending. In markets such as Aave, Compound, and Spark, a borrow position stays solvent as long as the health factor remains above 1.0. That makes it a practical single-number summary of how much protection exists between the current position and the protocol’s liquidation boundary. Traders often interpret it as a risk buffer rather than a profitability metric, because it reflects how much stress the collateral can absorb before forced deleveraging becomes possible.

LTV on its own is not enough to describe safety. A position can show the same current loan-to-value ratio across two assets while carrying very different liquidation risk, because each collateral type has its own liquidation threshold. This is why the calculation is useful for comparing positions across assets with different risk parameters. By combining collateral value, borrowed value, and liquidation LTV, the calculator shows not just whether a position is solvent, but how large the remaining cushion is before liquidation can be triggered.

The calculation starts with collateral value, meaning the current USD value of the assets posted to secure the loan. It then uses borrowed value, which is the outstanding debt in USD terms, including the amount that would need to be repaid to close the position. The key protocol parameter is liquidation LTV, sometimes called the liquidation threshold. This is not the same as the user’s current borrow ratio; it is the boundary set by the protocol for a specific collateral type. Health factor is computed by multiplying collateral value by liquidation LTV and dividing the result by borrowed value. If the result is above 1.0, the position remains solvent. If it falls below 1.0, liquidation can be triggered. The calculator also shows current LTV for context, along with the remaining borrowing room before the threshold is reached. A separate liquidation penalty input does not change the health factor itself, but it helps estimate how much collateral value may be consumed if liquidation occurs, since liquidators receive extra value beyond the debt they cover.

This calculator is most useful at the moments when liquidation risk needs to be translated into a clear buffer. When opening a new borrow position, it helps frame how much room exists between the initial debt level and the liquidation threshold. After collateral prices move, the same calculation shows whether that cushion has narrowed or widened. This matters because a position can remain solvent while still becoming materially more fragile as market prices change.

It is also useful when comparing collateral types. ETH, stablecoins, and other assets can have different liquidation thresholds, so the same current LTV does not imply the same level of safety across markets. In that sense, the calculator is less about a raw borrowing ratio and more about the relationship between a position and the protocol’s risk boundary. Traders also use it when sizing additional borrowing, since it reveals the maximum extra debt that can be added before the threshold is reached. Its limits are equally important: it is not a tool for predicting exact liquidation timing. Markets move continuously, debt can change over time, and protocol parameters are not fixed forever, so the output is best read as a snapshot of current conditions rather than a schedule of future events.

Consider a position with 10,000 USD of collateral and 6,000 USD of borrowed value. The collateral’s liquidation LTV is 82.5%, and the liquidation penalty is 5%. The first step is to convert the liquidation threshold into dollar terms: 10,000 × 0.825 = 8,250 USD. That means the protocol allows debt up to 8,250 USD before the position reaches its liquidation boundary. Dividing that threshold value by the current debt gives the health factor: 8,250 ÷ 6,000 = 1.375. The current LTV is 6,000 ÷ 10,000 = 60.0%.

From there, the remaining borrowing room is straightforward: 8,250 − 6,000 = 2,250 USD of additional debt before the threshold is reached. The collateral can also fall by about 27.3% before liquidation, based on 1 − (6,000 ÷ 8,250). If liquidation does occur, the penalty increases the collateral consumed: 6,000 × 1.05 = 6,300 USD of collateral value used to cover debt and penalty. In summary, the position is solvent with a health factor of 1.375, carries a 60.0% current LTV, has 2,250 USD of extra borrowing capacity, and becomes vulnerable after roughly a 27.3% collateral decline.

A frequent source of confusion is treating current LTV and liquidation LTV as if they were the same number. They are related, but they serve different purposes: current LTV describes the position now, while liquidation LTV defines the protocol’s risk boundary. Another common input error is entering token amounts instead of USD values. Because the formula compares values rather than unit counts, mixing token balances with dollar-denominated debt can distort the result immediately.

Users also often overlook the role of the liquidation penalty. It does not change the health factor formula, but it does affect how much collateral value is lost once liquidation begins. A separate mistake is assuming one threshold applies everywhere. In practice, each collateral asset can have its own liquidation LTV, so comparing positions without adjusting for asset-specific parameters can be misleading. Finally, health factor is sometimes treated as static when the underlying debt is not. Even if collateral prices remain flat, interest accrual can increase borrowed value over time, which gradually lowers the health factor and reduces the available buffer.

Liquidation-price calculators are a natural companion to health factor tools. Health factor expresses distance from liquidation as a ratio, while a liquidation-price model translates that same boundary into a specific asset price. Both are describing the same risk from different angles. Leverage is also closely connected, because borrowing against collateral increases exposure to the collateral’s price movements. As leverage rises, even modest market moves can have a larger effect on the health factor, which is why the metric becomes more important in leveraged positions.

Effective APY matters for a different reason: borrow interest increases debt over time. That means a position’s health factor can decline gradually even without a visible move in the collateral price. Tracking funding costs alongside liquidation risk gives a more complete picture of how a position evolves. Impermanent loss is only indirectly related, since it belongs to liquidity provision rather than lending, but both concepts involve measuring downside relative to a reference value. In each case, the core question is how far a position can move against expectations before losses become materially larger.