Crypto-backed debt can be liquidated when collateral no longer meets market rules. Monitor debt, accrued interest and prices together.
LTV and liquidation threshold
Simplified hypothetical example
Debt also changes
Separate the ratios
Opening loan-to-value limits and liquidation thresholds have different roles. The former constrain borrowing; the latter help determine liquidation eligibility. Parameters depend on market, asset, network and sometimes a special mode. Check current values in official documentation and interfaces before acting.
Calculate a health factor
Assume one collateral worth 1,000, an 80% liquidation threshold and debt of 600. The simplified factor is 1,000 × 0.8 / 600 = 1.33. These are not current protocol parameters. Multiple assets use weighted thresholds according to system rules; do not aggregate unlike collateral without adjusting the model.
Stress-test prices
If hypothetical collateral falls to 750, the factor reaches 1; at 700 it is about 0.93. Interest can increase debt and reduce the margin before collateral prices fall. A volatile borrowed asset can also rise in value. Correlated assets can diverge, particularly during a stablecoin depeg.
Understand liquidation
In markets such as Aave, a factor below 1 makes a position eligible for liquidation under applicable rules. Collateral may repay debt with compensation for the liquidator. Do not assume a grace period, full liquidation or a universal fixed rate. Alerts may be late or fail; they do not change contract rules.
Prepare possible responses
Reducing debt or adding eligible collateral may improve the margin if possible and executed in time. Check available funds, caps, approvals and network costs. Holding all repayment resources on an inaccessible platform creates dependence. A broadcast transaction offers no protection before execution; rehearse the response plan before stress.
Examine other dependencies
Contracts rely on oracle prices and potentially changing rules. Oracles, network availability, liquidity, deposited assets and governance add risks beyond price movement. A high margin does not neutralise technical failures. Record debt asset, amount, rate, collateral, thresholds and exit costs; relate borrowing to a concrete need without presenting leverage as assured yield.
Scenarios and model limits
| Situation | Interpretation |
|---|---|
| Hypothetical: debt 600, threshold 80%, collateral 1,000 | Factor: 1.33. |
| Same example: collateral 750 | Factor: 1.00; margin exhausted at boundary. |
| Same example: collateral 700 | Factor: 0.93; eligibility follows system rules. |
Frequently asked questions
Is a 1.01 health factor comfortable?
It leaves little margin where 1 is the relevant boundary. Prices, interest and rules may quickly change eligibility.
Is the liquidation threshold the LTV?
They are distinct parameters: initial borrowing capacity and liquidation eligibility must be assessed separately.
Does an alert prevent liquidation?
No. It may inform you; contracts still follow their rules and oracle data.
Verifiable sources
- Aave — Health factors and liquidations
- Aave — Borrow tokens
- Aave — Protocol risks
Ethereum.org — Oracles
Independent educational content reviewed against primary documentation. No personalized recommendation or promise of returns. Updated October 3, 2026
