Health Factor Explained

What is Health Factor?

The Health Factor is a numerical representation of the safety of your lending position. It's a critical metric in DeFi lending protocols that indicates how close you are to liquidation.

Formula

Health Factor = (Collateral Value × Liquidation Threshold) ÷ Debt Value

Components

Collateral Value: Total value of assets you've supplied as collateral
Liquidation Threshold: Maximum percentage of collateral value you can borrow (e.g., 80%)
Debt Value: Total value of assets you've borrowed

Interpretation

Health Factor Ranges

Range	Status	Risk Level	What It Means
> 2.0	🟢 Excellent	Very Low	Your collateral is worth 2x+ your debt. Very safe!
1.5 - 2.0	🟡 Good	Low	Healthy position with good buffer
1.1 - 1.5	🟠 Fair	Medium	Monitor closely, add collateral if price drops
< 1.1	🔴 At Risk	High	Danger zone! May be liquidated soon
< 1.0	🚨 Liquidation	Critical	Position WILL be liquidated

Example Calculation

Scenario

You supply $1,000 USDC as collateral
Liquidation threshold is 80%
You borrow $400 USDC

Calculation

Health Factor = ($1,000 × 0.80) ÷ $400
             = $800 ÷ $400
             = 2.0

Result: Health Factor of 2.0 = Excellent ✅

What Affects Health Factor?

1. Collateral Value Changes 📊

Price increases → Health Factor increases ⬆️
Price decreases → Health Factor decreases ⬇️

2. Debt Value Changes 💰

Borrowing more → Health Factor decreases ⬇️
Repaying debt → Health Factor increases ⬆️
Interest accrual → Health Factor slowly decreases ⬇️

3. Adding/Removing Collateral 🏦

Adding collateral → Health Factor increases ⬆️
Withdrawing collateral → Health Factor decreases ⬇️

Current Implementation in CreditRamp

Version 1 (Current)

Status: Simplified placeholder

// Currently hardcoded based on credit utilization
setHealthFactor(2.0);

The current implementation sets a conservative default of 2.0, which represents a healthy position suitable for the auto-lending model where users supply collateral but haven't borrowed yet.

Why 2.0?

Conservative safety margin
Represents 50% loan-to-value ratio
Aligns with "supply-only" model (no active borrowing)

Future Enhancement: Real Health Factor Calculation

Proposed Implementation

async function calculateHealthFactor(
  userAddress: string,
  poolId: string
): Promise<number> {
  // Load user's position from Blend
  const pool = await PoolV2.load(network, poolId);
  const userPosition = await pool.loadUser(userAddress);
  
  // Get collateral and debt values
  const collateralValue = userPosition.positionEstimate.totalEffectiveCollateral;
  const debtValue = userPosition.positionEstimate.totalEffectiveLiabilities;
  
  // Calculate health factor
  if (debtValue === 0) {
    return Infinity; // No debt = perfect health
  }
  
  const healthFactor = collateralValue / debtValue;
  return healthFactor;
}

Integration Points

After Wallet Connection

useEffect(() => {
  if (walletAddress) {
    fetchPoolData();
    checkWalletBalance();
    calculateUserHealthFactor(); // ← Add this
  }
}, [walletAddress]);

After Supply/Borrow Operations

await supplyCollateral(...);
await calculateUserHealthFactor(); // Update health factor

Periodic Updates

// Poll every 30 seconds for price changes
useEffect(() => {
  const interval = setInterval(() => {
    if (walletAddress) {
      calculateUserHealthFactor();
    }
  }, 30000);
  return () => clearInterval(interval);
}, [walletAddress]);

Blend SDK Integration

Loading User Position

import { PoolV2 } from '@blend-capital/blend-sdk';

// Load pool
const pool = await PoolV2.load(network, poolId);

// Load user's positions
const userPosition = await pool.loadUser(userAddress);

// Get position estimates
const estimate = userPosition.positionEstimate;

console.log('Collateral:', estimate.totalEffectiveCollateral);
console.log('Debt:', estimate.totalEffectiveLiabilities);
console.log('Health Factor:', estimate.totalEffectiveCollateral / estimate.totalEffectiveLiabilities);

Position Estimate Properties

From the Blend SDK:

totalEffectiveCollateral: Collateral value adjusted by collateral factors
totalEffectiveLiabilities: Debt value adjusted by liability factors
borrowCap: Maximum borrowing capacity
borrowLimit: Current borrow limit

UI Implementation

Current Display

<TooltipProvider>
  <Tooltip>
    <TooltipTrigger asChild>
      <div className="cursor-help">
        <p>Health Factor</p>
        <p className="text-2xl">{healthFactor.toFixed(2)}</p>
        {/* Color-coded status indicator */}
        {healthFactor >= 2.0 && <span className="text-green-400">Excellent ✓</span>}
        {healthFactor >= 1.5 && healthFactor < 2.0 && <span className="text-yellow-400">Good</span>}
        {healthFactor >= 1.1 && healthFactor < 1.5 && <span className="text-orange-400">Fair</span>}
        {healthFactor > 0 && healthFactor < 1.1 && <span className="text-red-400">At Risk!</span>}
      </div>
    </TooltipTrigger>
    <TooltipContent>
      {/* Detailed explanation */}
      <p>Health Factor Explained</p>
      <p>Measures the safety of your lending position.</p>
      <p className="font-mono">
        (Collateral Value × Liquidation Threshold) ÷ Debt Value
      </p>
      {/* Risk level breakdown */}
    </TooltipContent>
  </Tooltip>
</TooltipProvider>

Hover State

When users hover over the Health Factor stat, they see:

✅ Clear explanation
✅ Formula with actual numbers
✅ Color-coded risk levels
✅ Current status interpretation

Liquidation Risk

When Does Liquidation Happen?

Liquidation Threshold: Typically 80-85% for stablecoins

If your Health Factor < 1.0, liquidators can:

Repay part of your debt
Seize your collateral (with liquidation penalty)
Earn liquidation bonus (usually 5-10%)

Example Liquidation

Starting Position:

Collateral: $1,000 USDC
Liquidation threshold: 80%
Debt: $800 USDC
Health Factor: ($1,000 × 0.80) ÷ $800 = 1.0 ⚠️

After 1% Price Drop:

Collateral: $990 USDC
Debt: $800 USDC (unchanged)
Health Factor: ($990 × 0.80) ÷ $800 = 0.99 🚨
→ Liquidatable!

Liquidation:

Liquidator repays $800 debt
Liquidator receives $880 collateral (110% of debt)
You lose $880 - $800 = $80 (10% penalty)
You keep remaining $110

Best Practices

1. Maintain HF > 2.0 ✅

Always keep a safety buffer above 2.0 for price volatility

2. Monitor Regularly 👀

Check your health factor daily, especially in volatile markets

3. Set Alerts 🔔

if (healthFactor < 1.5) {
  sendNotification("⚠️ Health Factor below 1.5! Consider adding collateral.");
}

4. Act Quickly ⚡

If HF drops below 1.3:

Add more collateral immediately
Or repay some debt
Don't wait for it to reach 1.0!

5. Understand Your Assets 📚

Stablecoins: Less volatile, safer (HF ~1.5 ok)
Crypto assets: More volatile, need higher HF (>2.5 recommended)

Comparison to Other Protocols

Protocol	Health Factor Name	Safe Range	Liquidation Point
Aave	Health Factor	> 2.0	< 1.0
Compound	Borrow Capacity	> 50%	> 100%
Blend	Health Factor	> 2.0	< 1.0
MakerDAO	Collateralization Ratio	> 200%	< 150%

Blend follows the Aave model, which is widely understood and battle-tested.

Technical Deep Dive

Collateral Factor vs Liquidation Factor

From Blend reserves:

interface PoolReserve {
  collateralFactor: number;  // e.g., 0.75 = 75%
  liquidationFactor: number; // e.g., 0.80 = 80%
}

Collateral Factor: Max you can borrow against this asset (75%)
Liquidation Factor: When position becomes liquidatable (80%)

Buffer Zone

┌────────────────────────────────────────────┐
│  100% Collateral Value                     │
├────────────────────────────────────────────┤
│  80% ← Liquidation Threshold (HF = 1.0)    │ ⚠️
├────────────────────────────────────────────┤
│  75% ← Max Borrow (Collateral Factor)      │
├────────────────────────────────────────────┤
│  50% ← Conservative (HF = 2.0)             │ ✅
├────────────────────────────────────────────┤
│  40% ← Very Safe (HF = 2.5)                │
└────────────────────────────────────────────┘

The 5% buffer between collateral factor and liquidation factor gives you time to react before liquidation.

FAQ

Q: Why is my Health Factor not changing?

A: Currently it's set to a default value. Once real calculation is implemented, it will update based on your actual position.

Q: What's a "safe" Health Factor?

A: > 2.0 is considered safe. > 2.5 is very safe. < 1.5 requires attention.

Q: Can Health Factor be infinite?

A: Yes! If you have zero debt, your health factor is technically infinite (perfectly healthy).

Q: How often should I check it?

Daily for stable positions
Hourly in volatile markets
Real-time if HF < 1.5

Q: What causes sudden HF drops?

Collateral price crash
Borrowed asset price surge
High interest rates accumulating debt
Oracle price updates

Implementation Roadmap

Phase 1: Static Display ✅ (Current)

Show hardcoded Health Factor (2.0)
Add tooltip with explanation
Color-coded status indicators

Phase 2: Real Calculation (Next)

Integrate with Blend SDK loadUser()
Calculate based on actual positions
Update after supply/borrow operations

Phase 3: Live Updates

Poll for price changes every 30s
Show trend indicator (↑↓)
Warning notifications

Phase 4: Advanced Features

Historical graph
Liquidation price calculator
Risk simulation tool
Automated health factor management

Related Resources

Last Updated: Oct 29, 2024
Version: 1.0 (Static Implementation)
Next Version: 2.0 (Real Calculation) - Planned

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