Collateral 1 ETH at $3,000, debt 1,500 USDC, liquidation threshold 80%. What is HF?

1.6. 3,000 × 0.8 / 1,500 = 1.6. There is a margin, but it falls short of the “above 2” rule.

HF has dropped to 0.97. What happens?

Bots can liquidate part of the collateral at a discount. Below 1, liquidation is open to anyone. DeFi has no calls and no extensions.

ETH is dropping fast and your HF is 1.3. The smartest move?

Repay part of the debt or add collateral. You can only raise HF with less debt or more collateral. A new loan pushes it even lower.

Aave: deposits and loans without a bank

Lesson 24 of 58 in the course “Crypto”. Free, with animations and a quiz.

A bank made of code

Aave is DeFi’s largest lending protocol, holding tens of billions of dollars. Some people deposit coins and earn interest. Others borrow against collateral. There is no bank: the rules live in a smart contract, loans come in seconds, and nobody asks for ID. Rates float: the more people want to borrow a given coin, the higher the rate for both borrowers and lenders. Aave V4 launched in 2026, but the basics stayed the same.

Health factor in plain words

A loan on Aave is always smaller than the collateral. The key number is the health factor (HF): collateral times the liquidation threshold, divided by the debt. The threshold depends on the coin; for ETH it is around 80%. Example: you deposit 1 ETH at $3,000 and borrow 1,500 USDC. HF = 3,000 × 0.8 / 1,500 = 1.6. If ETH drops to $1,875, that is by 37.5%, HF becomes 1. Below one, liquidation starts.

Liquidation: how collateral gets lost

When HF falls below 1, anyone, usually a bot, can repay part of your debt and take part of your collateral with a bonus, a discount of a few percent. You do not lose everything at once, but you lose more than you would by exiting calmly. In sharp crashes, such as August 2024 or October 2025, DeFi liquidations came in waves worth hundreds of millions of dollars a day. The price drops faster than a person can wake up.

Borrower rules

Why borrow at all? Say you need money but do not want to sell your ETH: a sale can be a taxable event, and you give up future upside. But the rules are strict. Keep HF above 2: then you can survive ETH nearly halving. Turn on alerts, for example in the Aave app or your wallet. When the market falls, repay part of the debt or add collateral while HF is still high. And remember the borrow rate floats and can go up.

Check yourself

Collateral 1 ETH at $3,000, debt 1,500 USDC, liquidation threshold 80%. What is HF?
Correct answer: 1.6. 3,000 × 0.8 / 1,500 = 1.6. There is a margin, but it falls short of the “above 2” rule.
HF has dropped to 0.97. What happens?
Correct answer: Bots can liquidate part of the collateral at a discount. Below 1, liquidation is open to anyone. DeFi has no calls and no extensions.
ETH is dropping fast and your HF is 1.3. The smartest move?
Correct answer: Repay part of the debt or add collateral. You can only raise HF with less debt or more collateral. A new loan pushes it even lower.

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