## Understanding Your Initial Borrowing Capacity and Health Factor on Aave V3 Welcome to this guide on borrowing tokens using the Aave V3 platform. We'll explore how borrowing impacts your financial health on the protocol, specifically focusing on the critical "Health Factor" metric and the associated risks of liquidation. Let's start by examining a scenario where a user has an existing borrowed position of approximately 0.0009929 ETH. A key metric to immediately assess is the **Health Factor (HF)**. In this initial state, the user's Health Factor is 1.01. The Health Factor is a numerical representation of the safety of your loan within Aave. If this value drops below 1.00, your collateralized position becomes eligible for liquidation by other protocol users. With a Health Factor of 1.01, the user is precariously close to this liquidation threshold. Aave V3 flags this risk with a clear warning message: "Be careful - You are very close to liquidation. Consider depositing more collateral or paying down some of your borrowed positions." Consequently, when navigating to the "Assets to borrow" section, the user finds that the "Available" amount for tokens such as GHO or ETH is 0. This confirms that, due to the low Health Factor, the platform prevents further borrowing to protect the user from immediate liquidation and to maintain protocol stability. ## Boosting Your Borrowing Power: Supplying Additional Collateral To enable further borrowing and improve the safety of the existing loan, the most direct solution is to supply more collateral. In this demonstration, the user opts to supply DAI. The process is straightforward: 1. Navigate to the "Assets to supply" section within the Aave V3 interface. 2. Locate DAI and click the "Supply" button. 3. A "Supply DAI" modal window appears. This modal displays the maximum amount of DAI the user can supply from their connected wallet (in this case, 2.776... DAI, effectively their entire wallet balance of 2.78 DAI). 4. Crucially, the modal provides a preview of the anticipated impact on the Health Factor. Supplying this amount of DAI is projected to increase the Health Factor from the risky 1.01 to a much healthier 2.20. 5. The user proceeds to confirm the "Supply DAI" transaction, which requires approval from their Web3 wallet. Upon successful completion of the transaction, Aave V3 confirms: "All done. You Supplied 2.78 DAI." The user's dashboard updates to reflect this new deposit. As a result, the Health Factor improves to 2.20, net worth increases (as more assets are now managed within Aave, albeit as collateral), and, importantly, the "Borrow Power Used" decreases significantly from 100.00% to 55.49%. This reduction indicates that the user now has substantial capacity to borrow additional assets. ## Executing a Borrow: Loaning ETH on Aave V3 With an improved Health Factor of 2.20, the user is now in a position to borrow more assets. They decide to borrow additional ETH. The borrowing process unfolds as follows: 1. In the "Assets to borrow" section, the user selects ETH and clicks the "Borrow" button. 2. The "Borrow ETH" modal appears. It displays key information: * **Available to borrow:** 0.0007886 ETH (equivalent to $1.43 at the time of the transaction). * The current Health Factor is prominently shown as 2.20. 3. The modal also allows the user to explore how different borrow amounts will affect their Health Factor: * **Borrowing the MAX amount (0.0007886 ETH):** This action is projected to decrease the Health Factor from 2.20 down to 1.22. A warning accompanies this: "Borrowing this amount will reduce your health factor and increase risk of liquidation." * **Borrowing a smaller amount (e.g., 0.0001 ETH):** If the user chose to borrow less, the Health Factor would only decrease from 2.20 to 2.00, indicating a lower risk profile post-borrow. * This highlights a fundamental principle: **the more you borrow relative to your collateral, the lower your Health Factor will become, thereby increasing your risk of liquidation.** 4. Acknowledging the associated risks, the user decides to borrow the maximum available amount of ETH and confirms the transaction through their wallet. The transaction is successful, confirmed by the message: "All done. You Borrowed 0.0007886 ETH." ## Analyzing the Impact of Your New ETH Loan Following the successful borrowing of additional ETH, the user's Aave V3 dashboard updates to reflect the new state of their position: * **Total ETH Borrowed:** Increased to 0.0017815 ETH (valued at approximately $3.23). * **Net Worth:** Decreased to $1.92. This is because borrowing increases your debt, which is subtracted from your supplied assets to calculate net worth on the platform. * **Health Factor:** Decreased to 1.22, as accurately predicted by the borrowing modal. While still above the critical 1.00 threshold, it's considerably lower than the 2.20 prior to this borrow. * **Borrow Power Used:** Increased to 99.55%. This indicates that the user has once again utilized nearly all their available borrowing capacity, bringing them closer to the limits of their current collateralization. ## A Deeper Look at Liquidation Risk: Health Factor and LTV To gain a more granular understanding of the risks involved, Aave V3 provides a "RISK DETAILS" section, accessible via a button next to the Health Factor display. Clicking this reveals the "Liquidation risk parameters" modal. **Health Factor Visualization:** This section visually represents the user's current Health Factor (1.22) in relation to the **liquidation value of 1.00**. It explicitly states that if the Health Factor drops to or below 1.00, the user's supplied collateral can be liquidated by any participant in the Aave protocol. The modal reinforces that borrowing more tokens decreases the Health Factor, while repaying borrowed tokens or supplying additional collateral will increase it. **Current LTV (Loan to Value) Visualization:** The Loan to Value (LTV) ratio is another critical metric for understanding loan safety. It's calculated as: `(USD value of debt) / (USD value of collateral)` In this scenario, the user's current LTV is 62.72%. The visualization also displays the **Liquidation Threshold** for the user's overall position, which is 77.00%. If the LTV rises above this 77.00% threshold, the supplied collateral may be liquidated. This event—the LTV exceeding the Liquidation Threshold—directly corresponds to the Health Factor falling to 1.00. The visualization might also show a "MAX LTV" (e.g., 83.00% for the supplied DAI). This "MAX LTV" typically refers to the maximum percentage you can initially borrow against a *specific* collateral type when you first supply it, not the liquidation threshold for your overall loan position. The Liquidation Threshold is a distinct, usually higher percentage that, if breached, triggers liquidation. ## Examining Your Borrowed Asset: WETH on Aave To understand the specifics of the borrowed asset, the user can navigate to its details page. Since ETH on Aave V3 Ethereum mainnet is typically represented as WETH (Wrapped ETH), the details page is titled "WETH Wrapped ETH." The "Supply info" section for WETH (how to supply it as collateral) would have been covered in a separate context. Here, we focus on the **"Borrow info"** section: * **Total Borrowed (Market-wide):** This indicates the total amount of WETH borrowed by all users from this Aave market. For instance, 2.12 million WETH might be borrowed out of a total borrow cap of 2.70 million WETH for the Aave WETH market, representing a 78.34% utilization rate for the asset. * **APY, variable:** This is the current Annual Percentage Yield (interest rate) the user is paying on their borrowed WETH. In this example, it's 2.58%. This rate is variable and fluctuates based on the supply and demand dynamics within the WETH market on Aave. * **Borrow APR, variable (Graph):** A historical chart shows the Annual Percentage Rate for borrowing WETH, which might display an average like 2.66% over a certain period. Another important section is **"Collector Info"** (which may have been previously termed Reserve Factor details): * **Concept: Reserve Factor:** This is displayed as a percentage, for example, 15.00%. * **Definition:** The Reserve Factor dictates what portion of the interest paid by borrowers is allocated to a "collector contract." This contract is under the control of Aave governance. The collected funds are typically used to foster the growth and sustainability of the Aave ecosystem, often directed to the Aave DAO treasury. * **Practical Implication:** From a borrower's standpoint, the Reserve Factor can be understood as a **protocol fee**. In this case, 15% of the interest the user pays on their borrowed WETH is channeled to the Aave protocol. ## Key Concepts and Best Practices for Safe Borrowing on Aave This exploration of borrowing on Aave V3 highlights several crucial concepts and best practices: * **Health Factor (HF):** Your primary indicator of loan safety. A Health Factor below 1.00 exposes your collateral to liquidation. * *Action:* Supplying more collateral or repaying debt increases your HF. Borrowing more assets decreases your HF. * **Loan to Value (LTV):** The ratio of your total borrowed value to your total collateral value. * *Risk:* If your LTV exceeds the "Liquidation Threshold" for your collateral mix, your position can be liquidated. This event coincides with your HF reaching 1.00. * **Liquidation:** The process where, if your HF drops below 1.00 (or LTV exceeds its threshold), other users can repay a portion of your debt and, in return, claim a corresponding portion of your collateral, often at a discount. This results in a loss of your supplied assets. * **Supplying Assets:** Adding your crypto assets to Aave to serve as collateral. This allows you to earn interest on supplied assets and, more importantly for borrowing, increases your borrowing power and improves your Health Factor. * **Borrowing Assets:** Taking out a loan against your supplied collateral. This incurs interest, which is typically variable and subject to market conditions. * **Reserve Factor:** A percentage of the interest paid by borrowers that is collected by the Aave protocol. This acts as a protocol fee, contributing to the Aave DAO treasury and supporting ecosystem development. **Important Tips for Managing Your Aave Position:** * **Constant Monitoring:** Always keep a close eye on your Health Factor. A value consistently close to 1.00 is a high-risk situation requiring immediate attention. * **Proactive Management:** Don't wait for your Health Factor to become critical. If it starts trending downwards due to market volatility or accumulating interest, consider supplying more collateral or repaying a portion of your debt to improve it. * **Understand the Risk/Reward of Borrowing:** The more you borrow relative to your collateral, the lower your Health Factor and the higher your LTV will be, significantly increasing your liquidation risk. Only borrow amounts you are comfortable managing. * **Variable Interest Rates:** Be aware that the APY/APR for borrowing assets is variable. It can change based on the utilization rate of the asset pool (i.e., how much is being supplied versus borrowed). * **Protocol Fees (Reserve Factor):** Remember that a portion of the interest you pay (the Reserve Factor) goes to the Aave protocol. This is part of the cost of using the platform. By understanding these mechanics and diligently managing your Health Factor, you can navigate the borrowing facilities on Aave V3 more safely and effectively.