# Liquidation & Health Factor

Navigating decentralized finance necessitates a clear understanding of key mechanisms that ensure system stability. One crucial concept is **Liquidation** – a process meticulously designed to maintain the health of lending and borrowing protocols like Udon Finance, thereby protecting the assets of all participants.

## The Health Factor – Your Position's Safety Gauge

To precisely measure the safety and stability of a borrowed position, Udon utilizes a vital metric known as the **Health Factor**. Consider it the personal "pressure gauge" for your loan.

The formula is:

Health Factor=Total Borrow ValueTotal Collateral Value×Weighted Average Liquidation Threshold​

**What it signifies:** The Health Factor indicates the robustness of your borrow position.

* A Health Factor **above 1** signals that your position is **stable and secure**. The higher the number, the safer your loan!
* A Health Factor **below 1** signifies **danger!** Your position is at imminent risk of liquidation.

**What influences your Health Factor?** Your Health Factor is not static. It's a dynamic metric that responds directly to market conditions:

* **Collateral Value:** If the market value of your collateral (e.g., ETH) increases, your Health Factor **improves** (indicating greater safety). Conversely, if its price declines, your Health Factor **decreases** (signaling increased risk).
* **Borrowed Asset Value / Amount:** Should the value of the asset you've borrowed increase, or if you augment your borrowed amount, your Health Factor will **decline**.

**How can you improve your Health Factor?** You can proactively boost the health of your position by:

* **Supplying additional collateral:** Adding more crypto assets directly strengthens your safety buffer.
* **Repaying part of your loan:** Reducing your outstanding debt directly improves your position's health.

**Is there a "perfect" Health Factor?** While a Health Factor above 1 is the baseline for safety, there isn't a universally "ideal" number applicable to all scenarios. The optimal Health Factor can depend significantly on the volatility and correlation of your specific assets. For instance, a slightly lower Health Factor might be acceptable for stablecoins or assets with tight correlation, given their typically lower price fluctuations.

## Liquidation – When the Safety Gauge Dips Below 1

**Liquidation occurs when your Health Factor drops below 1.** At this critical point, the market value of your collateral is no longer deemed sufficient to securely back your loan. To protect the integrity of the protocol and its liquidity providers, the system automatically triggers a liquidation process.

* **Who performs it?** Any participant in the network can act as a **liquidator**. These are often automated bots or individuals who actively monitor borrow positions with a Health Factor below 1, seeking opportunities to participate in the liquidation process.
* **What happens during liquidation?**
  * **Partial Loan Repayment:** A portion of the borrower's outstanding debt is repaid by the liquidator.
  * **Collateral Sale:** In exchange for repaying the debt, a corresponding portion of the borrower's collateral is sold to the liquidator, usually with a **liquidation fee** added as an incentive.
  * Typically, up to **50% of the borrower's debt** can be liquidated in a single transaction to minimize market impact and allow the borrower an opportunity to react.
* **A Competitive Process:** Liquidations are inherently competitive. Successful liquidators require technical expertise and rapid response times to execute transactions quickly and claim the liquidation reward.

## Tools to Help Manage Your Health Factor

To ensure your borrow position remains secure and to mitigate liquidation risk, leverage the available tools:

* **Udon DApp Dashboard:** Your primary interface will prominently display your **Health Factor** and other crucial metrics in real-time. Regular monitoring is absolutely key!

Understanding your **Health Factor** and the **liquidation process** is fundamental for a secure and effective DeFi experience on Udon Finance. Always keep a vigilant eye on your position!

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