## Loan-To-Value: Health Factor In this lesson, we'll explore how to calculate the health factor and related concepts. Loan to Value Recap As a recap, in the previous lesson we reviewed how to calculate the maximum USD that a user can borrow based on these factors: - the LTV of the collateral - The amount of collateral that the user deposits - The price of the collateral In the example we reviewed a maximum borrow of $4500 USD. Since the price of collateral changes, it is important to understand what a health factor is. Health Factor A health factor is a single number which determines the condition of the borrow. It is used to determine if the borrower is overcollateralized or not. A borrower's collaterals are liquidated if the health factor of the borrower is less than 1. In order to calculate the health factor, there are 2 other concepts we need to cover: - Liquidation Threshold - Average Liquidation Threshold Liquidation Threshold The Liquidation threshold is a number between 0 and 1. With the condition that it is greater than or equal to the LTV. ```solidity LTV <= Liquidation threshold ``` The LTV (loan to value) number is specific for each collateral. The liquidation threshold is also specific for each collateral. Average liquidation threshold The average liquidation threshold has a goal to calculate the average of all the liquidation thresholds for a user's collateral. It is a weighted average of all the liquidation thresholds for all the collaterals a user has deposited. To be more precise, we will define three terms: - C_R(u) = USD value of collateral locked in reserve R by user u - B_R(u) = Debt in USD from reserve R by user u - L_R = Liquidation threshold of reserve R If a user locks 1 ETH as collateral into the ETH reserve and the value of the ETH is $3000 then: C_R(u) = 3000 The formula for average liquidation threshold for user u (L(u)): ```solidity L(u) = Average liquidation threshold for user u = Σ C(Ru) L(R) / Σ C(Ru) ``` Health Factor Health factor is a number that tells the Aave protocol whether a user's collateral can be liquidated or not. The health factor of user u (H(u)): ```solidity H(u) = Health factor of user u = L(u) Σ C(Ru) / Σ B(Ru) ``` Liquidation Condition Liquidation Condition if H(u) < 1