Tracking Positions
One of the biggest risks a borrower faces is liquidation that can result in the loss of some (or all) of their collateral.
To prevent getting liquidated, you need to keep a close eye on your borrow positions.
When you open a borrow position you will see your Health Factor. This is a visual representation of how close your borrow position is to being liquidated. The Health Factor is the most important signal you should track to prevent your borrow position from being liquidated
The Health Factor ranges from 100% (Safest) to 0% (Riskiest). When your Health Factor reaches 0%, your borrow position will be signaled for liquidation.
Simply put, Health Factor tracks the value of your loan in relation to the value of your collateral and determines how far your position is from the point of liquidation.
The Health Factor is given by the following formula:
Your borrow-to-collateral ratio, the first portion of the Health Factor formula, is given by:
Your borrow-to-collateral ratio will constantly change causing your health factor to increase or decrease.
Here is a list of events that could increase your Health Factor:
- 1.The value of your loan increases
- The price of borrowed asset goes up
- You decide to borrow more
- Your loan increases as borrowing interest accrues over time
- 2.The value of your collateral decreases
- Price of collateral asset goes down
- You withdraw some of your collateral
The fastest way to restore a good Health Factor is to pay part of all your loan.
This is the borrow-to-collateral ratio at which point your position will be signalled for liquidation. Every token asset has a different liquidation threshold that is determined by governance.
Your position is only signalled for liquidation when the Health Factor reaches 0%. This can happen quickly for reasons we have mentioned earlier. To make sure you never reach the Liquidation Threshold, we recommend that you maintain a Health Factor within the green to yellow area.
While it’s tempting to use all your borrowing power, cryptocurrencies can fluctuate rapidly resulting in unexpected liquidations.