Keep your positions above water by monitoring portfolio health
The purpose of these Health Metics is to help users manage their own portfolio risk. Users should find a balance between maximising their borrowing capabilities and budgeting for volatility in the market to avoid liquidations.
The Health Factor in zkLend is a numerical representation of the safety of your deposited assets in relation to borrowed assets. it is calculated by dividing a user’s Risk-adjusted Collateral by their Liabilities.
- Risk-adjusted Collateral: Sum of the market value of a user's collateral discounted by each asset’s Collateral Factor
- Liabilities: The sum of the market value of a user's outstanding borrowings and accrued interest
A Health Factor below 1 means that a user’s liabilities now exceed his/her borrowing capacity. During liquidation, the debt are repaid (either partial or full repayment) and the liquidation bonus is taken from the available collateral.
The Health Factor of your portfolio is influenced by changes in the underlying value of your deposits. For example, say you deposit ETH as collateral and use that to borrow DAI, and if the value of ETH drops, the underlying value of your collateral will decrease. This can negatively impact your Health Factor and increase the risk of liquidation.
Maintaining a strong Health Factor can provide you with portfolio flexibility in two ways:
- 1.Decreased likelihood of liquidation, especially when fluctuating assets are used as collateral (low-risk strategy)
- 2.Improved borrowing eligibility, allowing you to leverage more collateral (high-risk strategy)
The LTV ratio is a metric that reflects a user's leverage and portfolio health, calculated by dividing Risk-adjusted Liabilities by Collateral's market value. A lower LTV ratio is more generally more preferable from risk management perspective. (However, we also note that some users may strategically maintain a relatively high LTV ratio to increase leverage and maximize capital efficiency). While not directly involved in liquidation calculations, LTV ratio is often inversely correlated with the Health Factor.