Glossary
Collateral
Assets pledged against a loan, position, or token design.
Related guide: Stablecoin Reserves and Depeg Risk. Updated 2026-09-08.
Collateral in context
In a collateralized loan, posted assets secure debt. Their market value and the amount a lending system recognizes for risk calculations are not necessarily the same. A borrowing limit and a liquidation threshold are also distinct settings.
Important boundary
Collateral may be volatile and overcollateralized; reserves may be cash-like claims.
Liquidation eligibility does not require the raw collateral value to reach zero or fall below the debt. The system applies its risk threshold before that point.
Worked example
A price decline consumes the collateral buffer
Use a simplified lending position with $1,500 of collateral, $900 of debt, and an assumed 80% liquidation threshold. An Aave-style health factor is collateral value multiplied by the threshold, divided by debt: ($1,500 x 0.80) / $900 = 1.33. The 80% value is an exercise assumption, not a current setting for an asset.
If collateral value falls to $1,100 and debt stays unchanged, the calculation becomes ($1,100 x 0.80) / $900 = 0.98. That is below 1. The collateral is still worth more than the debt, but the threshold-adjusted buffer has already been exhausted.
Solving for the boundary gives $900 / 0.80 = $1,125. At that collateral value the simplified factor is exactly 1. Real positions can include several assets, different thresholds, interest, and changing oracle values. This exercise isolates one variable; it does not estimate a real liquidation price or the proceeds of a liquidation.
Continue in the guide
Reading a reserve claim without stopping at the headline
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Check the distinction
With $1,500 collateral, the same 80% threshold, and debt reduced to $750, what is the simplified health factor?
($1,500 x 0.80) / $750 = 1.60. This is a ratio under fixed assumptions, not a universal guarantee that a position is safe.
Source trail
Check the source or calculation
Source for the health-factor formula and the below-1 eligibility boundary. Our exercise uses fictional values and does not reproduce live asset parameters.