Two percentages sit next to every asset you can borrow against on Aave, and most borrowers read only the first one. For ether on Aave V3’s main Ethereum market, the first says you may borrow up to 81% of your collateral’s value. The second says the protocol starts selling your collateral once the debt reaches 84% of it. The three points between them are the whole cushion of a loan opened at the maximum: it becomes liquidatable after ether falls about 3.6%. Your Aave health factor is the single number that tracks where you stand between those two lines.
This lesson takes one loan, 2 ETH deposited and USDC borrowed, and works through it with pen and paper. You will compute the health factor, turn it into a liquidation price, see what a liquidation takes from you down to the dollar, and test the four ways to move the number. Then you read the same figures on Aave’s Sepolia testnet with test tokens, and set up a way to be warned before the line is reached. The parameters used are the on-chain values of Aave V3 Ethereum Core as of 29 October 2026. They are set by Aave governance and change by vote, so check them again before you rely on them.
One reminder before going further. How a lending blockchain that runs exactly as written when it is called, holding and moving funds according to its code, without an intermediary able to change the outcome.">smart contract holding reserves of two or more tokens, supplied by users, that a decentralized exchange uses to execute trades automatically at a price set by a formula.">pool works, why every DeFi loan is overcollateralised, how the interest rate follows utilisation and how eMode groups similar assets were covered in the previous lesson, our guide to crypto lending and borrowing on Aave and Morpho, which also walked through a first supply and borrow on the testnet. That ground is not covered again here. A liquidation is the forced repayment of part of your debt with your own collateral; who carries it out and what happens when it goes wrong is the subject of a later lesson.
Four numbers decide every Aave loan
Each asset listed on Aave carries a set of risk parameters stored in the pool contract itself, in a packed configuration word that anyone can read. Three of them matter to a borrower: the maximum loan-to-value, the liquidation threshold and the liquidation bonus. The fourth number, the health factor, is computed from them and from your own position.
Max LTV: how much you may borrow
The maximum loan-to-value (max LTV) caps how much you can borrow against an asset when you open or increase a loan. With ether at 81%, 1,000 dollars of ETH supplied as collateral lets you borrow at most 810 dollars of another asset. The cap only applies at the moment you borrow or withdraw: the protocol will refuse a new borrow that would go past it, but it does nothing if prices later push your loan above it.
The same three letters are used for a second, different thing, and that causes most of the confusion. Your current LTV is simply your debt divided by your collateral value today. Borrow 3,000 dollars against 5,000 dollars of ETH and your current LTV is 60%, whatever the max LTV of the asset is. Aave’s interface shows both figures; keep in mind which is which.
Liquidation threshold: the line that matters
The second parameter, the liquidation threshold, is the share of the collateral value that the debt may reach before the position can be liquidated. For WETH it is 84%. It is set a little above the max LTV, so that a loan opened at the cap does not become liquidatable in the very next block. That gap is small. For WETH it is 3 percentage points, for USDC used as collateral it is also 3 (75% and 78%).
Liquidation bonus: what the borrower pays
Aave calls it the liquidation bonus, and the word describes the liquidator’s side. When a position is liquidated, the liquidator repays part of the debt and receives collateral worth that amount plus the bonus. The bonus comes out of the borrower’s collateral, so from the borrower’s point of view it is a penalty: with WETH at 5%, every 1,000 dollars of debt repaid in a liquidation costs you 1,050 dollars of ether.
The contract keeps a slice of that bonus for the protocol. The configuration of WETH, USDC, staking means depositing a proof of stake coin with a protocol that stakes it for you and issues a transferable token (such as Lido stETH or rETH) representing the deposit plus rewards, which you can use or sell while the coins stay staked.">wstETH and WBTC on Aave V3 Ethereum Core sets a liquidation protocol fee of 20% of the bonus as of 29 October 2026, and the LiquidationLogic contract takes it from the bonus part of the seized collateral, not on top of it. The borrower loses the same amount either way; the fee only changes how the bonus is split between the liquidator and Aave’s treasury.
The health factor is one fraction
Aave’s help page on liquidations gives the formula: the total collateral value multiplied by the weighted average liquidation threshold, divided by the total borrow value. With a single collateral it reads: collateral value x liquidation threshold / debt. Above 1, the position is safe from liquidation for now. Below 1, anyone may liquidate it. The health factor is a ratio, not a percentage, and it has no upper limit: a position with no debt has an infinite health factor.
The values that go into it, read from the Aave V3 Ethereum Core pool contract on 29 October 2026 at 09:47 UTC:
| Asset | Max LTV | Liquidation threshold | Liquidation bonus | Protocol share of the bonus |
|---|---|---|---|---|
| WETH | 81% | 84% | 5% | 20% |
| USDC | 75% | 78% | 4.5% | 20% |
| wstETH | 79% | 82% | 6% | 20% |
| WBTC | 81% | 85% | 5% | 20% |
Two details about the inputs. The prices are those of Aave’s own price oracle, not the last trade on an exchange chart; your health factor moves with the oracle, and how oracles can be pushed or fail is covered in our advanced lesson on DeFi oracles. And the pool running today is revision 11 of the Aave V3 code, which matches release v3.7.0 of 5 August 2026. That release removed isolation mode, debt ceilings and siloed borrowing from the pool, so tutorials that still describe them refer to features the contract no longer has.
A worked loan: 2 ETH in, 3,000 USDC out
For the rest of the lesson, 1 ETH is worth 2,500 dollars. That is a round example price chosen to make the arithmetic easy, not a market quote (the Aave oracle showed about 2,323 dollars for ETH at 09:47 UTC on 29 October 2026). USDC is counted at 1 dollar. The parameters are the real ones from the table above.
- You supply 2 ETH as collateral, worth 5,000 dollars at the example price.
- Your borrowing power at the max LTV is 5,000 x 0.81 = 4,050 dollars.
- The liquidation line sits at 5,000 x 0.84 = 4,200 dollars of debt.
- You borrow 3,000 USDC. Your current LTV is 3,000 / 5,000 = 60%.
- Your health factor is 5,000 x 0.84 / 3,000 = 1.40.
A health factor of 1.40 says that the collateral, weighted by its threshold, covers the debt 1.4 times. It does not say ETH can fall 40%. The fall that brings the factor to 1 is 1 – 1/1.40, about 28.6%. That shortcut works for any single-collateral loan against a stable debt: the margin in price is one minus the inverse of the health factor.
Now compare three borrowers who all deposit the same 2 ETH but take different amounts:
| USDC borrowed | Current LTV | Health factor | ETH liquidation price | ETH fall to reach it |
|---|---|---|---|---|
| 2,500 | 50% | 1.68 | 1,488 dollars | -40.5% |
| 3,000 | 60% | 1.40 | 1,786 dollars | -28.6% |
| 4,050 (max LTV) | 81% | 1.04 | 2,411 dollars | -3.6% |
The third borrower did nothing the app would refuse. Borrowing the full allowance is permitted, and it leaves a cushion of 3.6% of the ether price, nothing more. The interface lets you borrow up to the max LTV; it does not tell you that you should.
How to calculate your Aave liquidation price
The liquidation price is the collateral price at which the health factor reaches exactly 1. Set the formula equal to 1 and solve for the price: liquidation price = debt / (amount of collateral x liquidation threshold). For the 3,000 USDC loan: 3,000 / (2 x 0.84) = 1,785.71 dollars. Below that oracle price for ETH, the position can be liquidated.
The reverse formula gives the health factor at any price P: amount x P x threshold / debt. Here is how the 3,000 USDC position behaves as the example price changes:
| ETH price (example) | Collateral value | Health factor |
|---|---|---|
| 3,000 | 6,000 | 1.68 |
| 2,800 | 5,600 | 1.57 |
| 2,500 | 5,000 | 1.40 |
| 2,300 | 4,600 | 1.29 |
| 2,000 | 4,000 | 1.12 |
| 1,900 | 3,800 | 1.06 |
| 1,800 | 3,600 | 1.01 |
| 1,786 | 3,572 | 1.00 (liquidation line) |
| 1,700 | 3,400 | 0.952 |
| 1,600 | 3,200 | 0.90 |
| 1,500 | 3,000 | 0.84 |
Two prices on that table deserve attention. At 1,786 dollars the position becomes liquidatable. At about 1,696 dollars the health factor crosses 0.95, and the rules change in a way that costs the borrower more, as the next section shows.
Nor is the liquidation price fixed. Your debt grows every block with the borrow rate. At an example rate of 5% a year, the 3,000 USDC becomes 3,150 after twelve months, the health factor slips from 1.40 to 1.33 with ETH unchanged, and the liquidation price rises from 1,786 to 1,875 dollars. The ETH you supplied earns a little interest too, which softens the drift without cancelling it. Rates move, so redo the sum from time to time rather than once.
What happens when the health factor falls below 1
Once the factor is under 1, a liquidation is open to anyone: Aave’s help page describes liquidations as permissionless and the competition for them as intense. The liquidator calls the pool’s liquidationCall function, names the collateral it wants and the debt it repays, and the contract checks the limits. Who these liquidators are and how they make money belongs to a later lesson. Here the question is what the contract allows them to take.
How much of the debt can be repaid: 50%, 100% and the 0.95 line
The amount is set by what Aave calls the close factor, written into the liquidation code as constants. As of 29 October 2026 the rule in Aave V3 is:
- If the health factor is above 0.95 and both the collateral and the debt involved are worth at least 2,000 dollars, a liquidator may repay up to 50% of the borrower’s total debt.
- At a health factor of 0.95 or lower, the whole debt of the reserve being repaid can be liquidated in one call.
- When the collateral or the debt involved is worth less than 2,000 dollars, the whole debt can also be liquidated, whatever the health factor.
- A partial liquidation must leave at least 1,000 dollars of both collateral and debt; otherwise the liquidator has to clear the debt or take all the collateral.
The 2,000 and 1,000 dollar values are measured in the reserves involved in the call (the collateral seized and the debt repaid), and the 50% is computed on the borrower’s whole debt in dollars. The last rule stops liquidators from leaving small leftovers that nobody would bother to clear.
What the liquidation takes, in dollars
Suppose ETH drops to 1,780 dollars. The collateral is worth 3,560 dollars, the debt is still 3,000, and the health factor is 3,560 x 0.84 / 3,000 = 0.997. That is below 1 but above 0.95, and both sides are above 2,000 dollars, so the 50% rule applies.
- The liquidator repays 1,500 USDC, half of the debt.
- It receives collateral worth 1,500 x 1.05 = 1,575 dollars, or 0.8848 ETH at 1,780 dollars.
- Of the 75 dollar bonus, 20% (15 dollars) goes to the protocol and the liquidator keeps 60 dollars before its gas costs.
- You are left with 1.1152 ETH, worth 1,985 dollars, and a debt of 1,500 USDC.
- Your new health factor is 1,985 x 0.84 / 1,500 = 1.11.
You still hold the 3,000 USDC you borrowed at the start, so the liquidation did not take everything. The cost is the 75 dollar bonus, plus the fact that half your ether was sold at the bottom of a fall, not at a moment you chose. Had you repaid the same 1,500 USDC yourself while the health factor was still at 1.2, there would have been no bonus at all. And the remaining position, at 1.11, can be liquidated again if ETH keeps falling.
Now suppose ETH gaps straight to 1,600 dollars between two oracle updates. The health factor is 0.90, below 0.95, so the whole 3,000 USDC can be repaid in one call. The liquidator takes 3,000 x 1.05 = 3,150 dollars of ETH, 1.969 of your 2 ETH, and leaves you about 0.031 ETH. The bonus is now 150 dollars. A fast fall does not just reach the line sooner: it moves you into the rule that takes everything at once.
If collateral runs out while debt remains, the contract records the shortfall as a deficit on the debt reserve. That is bad debt, and the later lesson on liquidations covers how Aave handles it.
Four ways to raise your health factor
Two direct ways to improve the number are named on Aave’s help page: supply more collateral or repay part of the debt. Two more come from changing which collateral you hold. All four start here from the worked loan: 2 ETH at 2,500 dollars, 3,000 USDC owed, health factor 1.40. Each one is a transaction, so each one costs gas. Gas is priced by demand for block space, so in a crash, when many borrowers try to act in the same minutes, the same repair can cost more than it would on a quiet day.
Repay part of the debt
Repaying 200 USDC brings the debt to 2,800 and the health factor to 5,000 x 0.84 / 2,800 = 1.50. Repaying 1,000 USDC brings it to 2.10. Repayment works in any market, and it is the only lever that reduces what you owe.
Add collateral
Supplying another 0.5 ETH raises the collateral to 6,250 dollars and the health factor to 1.75. About 0.143 ETH is enough to reach 1.50. The catch: the added collateral is the same asset, so if ETH keeps falling, it falls too.
Switch to a stablecoin collateral
Swap the 2 ETH for 5,000 USDC and supply that instead. The health factor becomes 5,000 x 0.78 / 3,000 = 1.30, lower than before because USDC has a lower threshold than ETH. But it no longer moves with the price of ether: a USDC collateral against a USDC debt barely changes. The risk does not disappear; it becomes the risk that the stablecoin loses its peg or that its oracle misbehaves, and you give up any gain if ether rises. The swap itself may also be a taxable disposal, a point treated in a later lesson.
eMode, for assets that move together
Efficiency mode replaces an asset’s parameters with those of a category when both the collateral and the borrowed asset belong to it. Category 1 on Aave V3 Ethereum Core, labelled “ETH correlated” on-chain, sets a max LTV of 93%, a liquidation threshold of 95% and a bonus of 1% as of 29 October 2026, against 79%, 82% and 6% for wstETH outside it. The category is narrow: on the same date its on-chain settings admitted seven of the market’s assets as collateral, WETH and wstETH among them, and only WETH as a borrowable asset.
An illustration with the oracle prices of 29 October 2026 at 09:47 UTC: 2 wstETH (5,796 dollars) as collateral and 1.8 WETH borrowed (4,182 dollars). Outside eMode the health factor is 5,796 x 0.82 / 4,182 = 1.14. In the ETH correlated category it is 5,796 x 0.95 / 4,182 = 1.32, and the most you could borrow rises from 4,579 to 5,390 dollars. What would liquidate this position is not the price of ether but the price of wstETH measured in ETH: it would have to fall 24.1% here. Borrow at the eMode maximum, though, and a fall of 2.1% in that ratio is enough (1 – 93/95). Leaving the category, or borrowing an asset outside it, puts the normal parameters back, and the health factor drops at once.
Several collaterals: a weighted threshold and no single price
With more than one collateral, Aave uses a weighted average of their thresholds, each weighted by its dollar value. Take 1 ETH at 2,500 dollars (threshold 84%) and 0.05 WBTC at an example price of 80,000 dollars, worth 4,000 dollars (threshold 85%), against 3,500 USDC of debt. The weighted threshold is (2,500 x 0.84 + 4,000 x 0.85) / 6,500 = 84.6%, and the health factor is 6,500 x 0.846 / 3,500 = 1.57.
- If ETH alone falls 40%, the health factor drops to 1.33: the bitcoin half absorbs part of the shock.
- If WBTC alone falls 40%, it drops to 1.18, because WBTC is the larger share.
- If both fall 40%, it drops to 0.94: liquidatable, and under 0.95, so the whole debt of a reserve can go in one call.
Try to compute an ETH liquidation price for this position while holding bitcoin still, and you get 119 dollars: ether alone cannot sink it. A liquidation price only exists when you freeze every other price. With several collaterals there is a surface of price combinations, not one line, and in a crash assets tend to fall together. Several debts simply add up in the denominator.
One more point the formula hides: when a mixed position is liquidated, the liquidator chooses which collateral to seize and which debt to repay, in the parameters of its call. You do not choose which asset you lose.
Tutorial: read your Aave health factor on the Sepolia testnet
Aave’s developer documentation states that the protocol is available for testing on the Sepolia testnet, reached by switching on testnet mode in the top right corner of app.aave.com. Test tokens have no value, so nothing here costs real money. Use a fresh self-custody wallet created only for tests, never the wallet that holds your funds.
Know two things before you start. The test market has its own parameters: on 29 October 2026 the Sepolia pool set WETH at a max LTV of 80%, a liquidation threshold of 82.5% and a bonus of 5%, and the test oracle priced WETH at exactly 4,000 dollars and USDC at 1 dollar. Those round prices did not move when we read them, so on the testnet your health factor changes when you change your amounts, not with the market. You can check every calculation of this lesson there; you cannot sit and watch a liquidation happen.
- Open app.aave.com, switch on testnet mode in the top right corner and select the Sepolia V3 market.
- Get a little Sepolia ETH for gas from a public faucet; these faucets are run by third parties, not by Aave.
- Click Connect Wallet and pick your test wallet, then open the Faucet tab and request test WETH and test USDC.
- Supply 1 test WETH as collateral and approve the transaction in your wallet.
- Borrow 2,000 test USDC from the Assets to Borrow table of the Dashboard. Aave’s help page on borrowing says the app shows the LTV and your health factor before you confirm, and the Dashboard keeps showing the health factor afterwards: note both values.
- Do the sum on paper with the test parameters: 1 x 4,000 x 0.825 / 2,000 = 1.65. Your liquidation price is 2,000 / (1 x 0.825) = 2,424 dollars, and your maximum borrow is 4,000 x 0.80 = 3,200 USDC. Compare with what the app shows; if governance has changed the test market since 29 October 2026, use the parameters the app displays.
- Borrow 1,000 more USDC and check that the health factor falls to 1.10, as 4,000 x 0.825 / 3,000 predicts.
- Repay 1,000 USDC and watch the factor go back up; then supply more WETH and watch it rise again.
- Finish by repaying the whole debt and withdrawing your collateral, so that you have practised the exit as well.
For a position on the main network, the same figures can be read without any interface. The pool contract has a function called getUserAccountData that returns, for any address, the total collateral, the total debt, the borrowing power left, the weighted liquidation threshold, the LTV and the health factor (the last one with 18 decimals). On Etherscan, open the Aave V3 pool contract, choose “Read as Proxy”, paste an address into that function and query it. It is read-only and needs no wallet connection.
Watching an Aave health factor: simulators and alerts
A position on the main network needs watching between visits to the app. Aave’s own help page points to two outside tools and labels both “use at your own risk”.
The first, DeFi Simulator, describes itself as an unofficial, open-source, community-built debt simulator and liquidation calculator, and as experimental. You paste a wallet address or an ENS name, then move the amounts supplied and borrowed or the asset prices to see the health factor, the borrowing power and the price at which the factor reaches 1. It needs no wallet connection, no signature and no transaction, and on 29 October 2026 its page listed ten Aave V3 markets, from Ethereum and Arbitrum to Monad and MegaETH, plus ten Aave V4 markets on Ethereum. It is the easiest way to check the liquidation price you computed by hand.
The second, DeFi Saver, offers automation (such as repaying from collateral when a level is hit) and an alert service called Notify. Its help pages say Notify works for positions on Aave and other protocols on Ethereum, Arbitrum, Base and Optimism, sends a warning when a ratio threshold you pick is crossed, in either direction, and delivers it in the app, by Telegram, by e-mail or by Blockscan chat. Note that DeFi Saver speaks of a ratio, its own display of the position’s safety, rather than of the health factor itself: check how it maps to Aave’s number in its interface before choosing a threshold. Automation that repays for you is a separate service. Whoever runs it still has to get a transaction into a block, so in a fast fall it can act later than the moment its trigger was set for; an alert or an automation reduces the risk, it does not remove it.
None of these tools makes a position safe. An alert gives you time to act; you still need funds on hand to repay or to add collateral, and enough ether in the wallet to pay the gas.
What changes in Aave V4
Aave V4 runs on Ethereum next to V3, but it is still much smaller. On DefiLlama’s count of 29 October 2026, Aave V3 held 16.26 billion dollars of deposits net of loans and 11.47 billion dollars of borrowing; Aave V4 held 0.75 billion and 0.48 billion. Nearly all positions therefore follow the V3 rules described above.
V4 changes the liquidation itself. Aave Labs’ article on V4 liquidations of 11 December 2025 explains that the fixed 50% and 100% close factor gives way to a target health factor: a liquidator may repay only enough debt to bring the position back to that level, which governance sets for each Spoke (the V4 name for a market). The bonus is no longer fixed either: the lower the health factor, the higher the bonus, in the manner of a Dutch auction. Aave’s V4 documentation keeps the same trigger: a position becomes eligible below a health factor of 1.0. We found no deployed target values or bonus settings published as of 29 October 2026, so read them in the app for the market you use.
What the formula does not show
- The oracle price can differ from the price on your exchange, and the health factor follows the oracle.
- A gap in price can skip the zone between 1 and 0.95 and expose the whole debt at once, as in the 1,600 dollar example.
- Interest raises the debt every block, so the liquidation price creeps up even when markets are flat.
- A collateral that is supposed to track another (wstETH and ETH, or a stablecoin and the dollar) can come apart, and eMode makes that the main risk.
- Every repair costs gas, and gas follows demand for block space, so it can be dearer in the very hour you need it.
- Parameters belong to governance: a vote can lower a liquidation threshold, and your health factor with it.
No insurance stands behind any of this. A loan in a smart contract is not a bank product. In the United States, the FDIC lists crypto assets among the financial products it does not insure, even when bought from an insured bank, and an Aave position is not a bank deposit in the first place. In the United Kingdom, the FCA said in a statement of 31 July 2019 that unregulated cryptoassets such as ether are not covered by the Financial Services Compensation Scheme and that consumers have no recourse to the Financial Ombudsman Service. If you are liquidated, nobody refunds the bonus. How the IRS or HMRC look at a liquidation for tax purposes is covered in a later lesson.
Before borrowing, write down three figures: your Aave health factor, your liquidation price and the fall in percent that separates today’s price from it. Decide which lever you would pull, and keep the means for it in the wallet, including a little ether for gas. Then try the same position on the Sepolia testnet or in a simulator before any real money moves. For the 3,000 USDC loan of this lesson, the three figures are 1.40, 1,786 dollars and 28.6%.
