What’s a Good Health Factor in DeFi? Managing Risk

In the world of decentralized finance (DeFi), maintaining a good health factor is crucial to avoiding liquidations and keeping your positions secure. Whether you’re borrowing against stablecoins or more volatile assets like ETH or BTC, understanding what constitutes a good Aave health factor or a good Morpho health factor can help you optimize risk and returns.

What Is a Health Factor?

The health factor (HF) is a number that represents how safe your collateralized loan is. It’s calculated based on the value of your supplied assets versus your borrowed assets, factoring in the liquidation threshold of each asset.

• HF above 1: Your position is safe (for now).
• HF at 1: You’re at the edge of liquidation.
• HF below 1: Liquidation happens automatically.

What’s a Good Health Factor?

The ideal health factor depends on the assets involved.

Stablecoin Positions: Keep It Low but Safe (1.1 – 1.5 HF)

If you’re borrowing against stablecoins (like USDC or DAI), a safe health factor can be relatively low—1.3 or even lower—because stablecoins have minimal price volatility. However, keeping it above 1.2 is recommended to avoid liquidations from fees or sudden changes in collateral weight.

ETH & BTC as Collateral: Moderate Safety (1.5 – 2.0 HF)

Ethereum (ETH) and Bitcoin (BTC) are more volatile than stablecoins, so a good Aave health factor or good Morpho health factor for these assets should be higher—1.5 to 2.0. This gives you some buffer against price swings while still optimizing capital efficiency.

Altcoins & High-Volatility Assets: Play It Safe (2.0+ HF)

If your collateral includes high-volatility assets like memecoins, DeFi tokens, or low-liquidity assets, a safe health factor would be 2.0 or higher. Sudden drops in value could wipe out your position if you’re too close to liquidation. And the more volatile your assets, the more closely you should be watching your position.

Health Factors on Aave vs. Morpho

• Aave: The traditional lending market uses liquidation thresholds and fixed health factor calculations. A good Aave health factor is usually 1.5+ for ETH and BTC, while 1.3+ is acceptable for stablecoin-backed loans.
• Morpho: As a peer-to-peer optimized lending protocol, Morpho may allow slightly more efficient borrowing with better rates, but a good Morpho health factor still follows similar risk levels—1.5+ for ETH/BTC, 2.0+ for volatile assets.

Best Practices for Maintaining a Good Health Factor

1. Monitor Market Conditions: If your collateral is dropping, be proactive about repaying debt or adding more collateral.
2. Set Alerts: Use automation tools like DeFi Saver to notify you when your HF gets too low.
3. Use Low-Liquidation-Threshold Assets: Some assets are riskier due to their liquidation parameters—check Aave or Morpho’s docs before borrowing.
4. Consider Looping Strategies Carefully: Borrowing and supplying recursively (e.g., with stETH or rETH) can optimize yield, but always leave room for market swings.

Final Thoughts

A good health factor varies depending on your assets, platform, and risk tolerance. For stablecoins, 1.3 is often fine, but for volatile assets, 1.5-2.0+ is safer. Whether you’re on Aave, Morpho, or another DeFi lending platform, understanding these nuances can help you avoid costly liquidations while maximizing your capital efficiency.