Deciphr Academy
Track 4 · Module 20 · Lesson 7 of 7 · 8 min read

How do you work out the health factor, liquidation price and interest on a crypto loan?

Short answer

Multiply the collateral's value by its liquidation threshold and divide by the debt to get Aave V3's health factor; divide the debt by (tokens × threshold) to get the price at which it hits 1.1,2 Interest on a variable rate moves with the pool, so any estimate holds only at today's rate.3,4

Where each loan hits a health factor of 1$2,500 today$2,343.75loan $375,000$1,875loan $300,000$1,250loan $200,000if ether fallsSame 200 ether, 80% threshold: the bigger the loan, the smaller the fall
Fig. 7. Three loan sizes against the same 200 ether. The bigger the loan, the smaller the fall in price that triggers a liquidation.

The question

The four sums

Every sum in this lesson uses the definitions from earlier lessons: LTV and the health factor as Aave documents them, and interest as Aave and Compound describe it.5,1,4

The four sums
  1. Most you can borrow = collateral value × LTV.5
  2. Health factor = collateral value × liquidation threshold ÷ debt.1
  3. Liquidation price = debt ÷ (number of tokens × liquidation threshold). This is our rearrangement of the health factor.1
  4. Interest = debt × yearly rate × days ÷ 365. This is simple interest, and leaves out compounding.6,4

Three loan sizes

Borrowing more lowers the health factor and raises the liquidation price, so a smaller fall can trigger a liquidation.1 On Aave V3, borrowing the full LTV leaves only the gap between LTV and threshold as a cushion, the gap Aave calls a safety mechanism.7

Interest adds up

Interest is added all the time, so the debt grows and the health factor drifts down, even when prices stand still.2,4 And because the rate is variable, it can jump when the pool gets busy.3

A fall in price

The liquidation rules decide how much is taken, and how fast.1 Under Aave V3's rules, a health factor of 0.95 or below lets a liquidator repay the whole debt in one go.1,8 If the collateral is worth less than the debt, Aave V3's code lets the liquidator take all of it, and records the debt left over as a deficit.8

What the sums leave out

  • Speed. Maker's post-mortem says ether and the wider crypto market lost over half their value in 36 hours in March 2020.9
  • Rates. A variable rate moves with utilisation, so today's 5% is not a promise.3,10
  • Rules. Thresholds, bonuses and caps can change by governance vote.5
  • The oracle's price. Liquidations follow the oracle's price, not the one you see on an exchange.1,11
  • Code. Bugs and exploits are a separate risk that no sum captures.12
Our viewThe sums take five minutes. The hard part is deciding, before the market moves, what you will do when it does.
Sources
  1. Health Factor & Liquidations. Aave (Aave Help), page read 24 October 2026.
  2. Aave V3 Overview. Aave Protocol Documentation, page read 24 October 2026.
  3. Borrow Interest Rate (Aave risk documentation). Aave, aave/risk-v3 repository on GitHub, last edited 9 October 2023; read 24 October 2026.
  4. Interest Rates (Compound III docs). Compound III documentation, page read 24 October 2026.
  5. Reserve (Aave V3 concepts). Aave Protocol Documentation, page read 24 October 2026.
  6. Glossary. Aave Protocol Documentation, page read 24 October 2026.
  7. Risk Parameters (Aave risk documentation). Aave, aave/risk-v3 repository on GitHub, last edited 9 September 2023; read 24 October 2026.
  8. LiquidationLogic.sol (Aave V3 code). Aave DAO, aave-dao/aave-v3-origin repository on GitHub, file last changed 31 March 2026; read 24 October 2026.
  9. The Market Collapse of March 12-13, 2020: How It Impacted MakerDAO. MakerDAO blog (Wayback Machine copy of 29 April 2020), 1 April 2020.
  10. Liquidity Pool (Aave V3 concepts). Aave Protocol Documentation, page read 24 October 2026.
  11. Oracle. Aave Protocol Documentation, page read 24 October 2026.
  12. Risks. Aave Protocol Documentation, page read 24 October 2026.
← The risks of lending and borrowingTake the quiz →

General education built from the publicly available sources listed above. Not financial, legal, tax or investment advice. Naming a company, project or regulator is not an endorsement either way. Last checked 2026-10-24. Terms and disclaimer.