Learning guide
On-Chain Credit Health and Liquidation Metrics
Understand collateral factors, collateral ratios, health factors, liquidation thresholds, and the sequence that can lead to liquidation.
Vocabulary-first analysis, reviewed against primary references where they are listed. Read our editorial methodology.
Credit metrics compress a rule set into a number
On-chain lending interfaces often summarize a position with ratios or a health score. That number is useful only when the reader understands the policy behind it: which assets count as collateral, how much borrowing each asset supports, and which price source updates the calculation.
A high collateral balance does not automatically mean a large borrowing limit. Protocols can apply different collateral factors or loan-to-value limits to assets based on volatility, liquidity, concentration, and governance decisions.
Borrowing power and liquidation triggers are not identical
A collateral factor or loan-to-value limit describes how much debt a position may initially support. A liquidation threshold describes when the position becomes eligible for forced repayment. Keeping these parameters separate creates a buffer between opening a loan and liquidation.
A health factor usually combines collateral value, asset-specific thresholds, and debt into one indicator. The exact formula varies, which is why a reader should not compare scores from different protocols as if they used one universal scale.
Liquidation is a chain of events
A market move, interest accrual, withdrawal, or oracle update can reduce the safety buffer. If the protocol's threshold is crossed, a liquidator may repay eligible debt and receive collateral under the protocol's rules. Fees and a liquidation penalty can change the final amounts.
The sequence matters: source price, parameter update, eligibility check, transaction submission, and settlement are distinct steps. Naming each step is more informative than saying a position was simply risky.
How this appears in the game
Collateral factor, collateral ratio, health factor, liquidation threshold, liquidation penalty, and oracle terms usually group around credit health and forced-position risk.
The site explains how to read the vocabulary. It does not calculate a user's position, recommend leverage, or provide liquidation alerts.
Applied reading
Explaining why one borrowing position moved toward liquidation
A dashboard shows that a position's health factor fell after the collateral price changed. That observation is incomplete without the debt value, collateral eligibility, weighted liquidation threshold, oracle update, and accrued interest. Each input can move the result even when the wallet takes no new action.
A useful review reconstructs the calculation using the protocol's current parameters. It separates the initial borrowing limit from the liquidation threshold and records which oracle price the protocol actually consumed. The interface number is then a summary of a known rule set rather than an unexplained warning color.
If the threshold is crossed, eligibility for liquidation does not mean every position is closed immediately. A liquidator still needs to observe the state, submit a valid transaction, and compete for execution under the protocol's rules. Eligibility, execution, and final settlement are separate events.
Concept boundaries
Terms that are easy to confuse
Collateral factor
The share of an asset's value that a protocol allows to support borrowing capacity.
It is an asset or market parameter, not the current health of one complete position.Collateral ratio
A comparison between collateral value and the debt or issued value it supports.
A ratio can be displayed in different directions and should be read with its formula.Health factor
A protocol-specific summary of collateral, liquidation thresholds, and debt.
It changes with inputs and rules; it is not a universal credit score.Liquidation threshold
The protocol boundary at which a borrowing position becomes eligible for liquidation.
It is not necessarily the same as the maximum loan-to-value used when borrowing begins.Knowledge check
Test the distinction, not the definition
Why should two protocols' health factors not be compared without documentation?
They may use different formulas, asset parameters, oracle inputs, thresholds, and liquidation processes.
What can lower a position's safety buffer without a new borrow?
Collateral price changes, debt-asset price changes, accrued interest, withdrawals, oracle updates, or governance parameter changes.
What is the difference between liquidation eligibility and execution?
Eligibility means the protocol rules permit liquidation; execution requires a valid transaction to be observed, submitted, and settled.
Source trail
Primary references used for this guide
These references support the terminology and risk distinctions above. They are provided so readers can verify the underlying material.
FAQ
Is a health factor the same across every lending protocol?
No. The formula, asset parameters, oracle inputs, and liquidation rules are protocol-specific, so the number must be read with its documentation.
Does collateral value alone determine liquidation?
No. Debt value, collateral eligibility, protocol parameters, oracle prices, accrued interest, and transaction execution can all affect the result.