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Aave liquidation is triggered below 1: Health Factor thresholds and collateral loss

Published on 5 August 2026

Aave liquidation is an onchain debt-repayment event that starts once a V3 borrower's Health Factor falls below 1. A liquidator repays eligible debt and receives the borrower's collateral at its configured liquidation bonus. Collateral loss therefore combines the debt-equivalent value transferred, the reserve-specific bonus, and any protocol share of that bonus. Prices, accrued debt, close-factor limits, and dust rules determine how much settles in one transaction. These rules describe Aave V3 markets.

Bottom line: A buffer above 1 must absorb both collateral price moves and continuously accrued variable debt.

Set the buffer from the position's break-even move

The Aave V3 Health Factor buffer measures the distance between an account's current reading and the liquidation boundary of 1. The borrower must choose a buffer that absorbs the plausible movement of both collateral and debt assets. At exactly 1, the position has reached the boundary; eligibility begins when the onchain value moves below it.

Five inputs settle that decision:

• The oracle value of every asset enabled as collateral.
• The oracle value of each borrowed asset.
• The liquidation threshold assigned to every collateral reserve.
• Interest added to outstanding variable debt.
• Collateral deposits, withdrawals, debt draws, and repayments.

A single protocol-wide safe target does not exist because WETH-backed USDC debt behaves differently from a closely correlated pair. Wider buffers absorb larger relative price moves and longer periods of debt accrual. A narrow margin leaves fewer confirmed transactions between a market move and permissionless liquidation.

Liquidation threshold, LTV, and Health Factor answer different questions

Aave liquidation eligibility uses Health Factor, not the displayed loan-to-value ratio alone. Loan-to-value, liquidation threshold, and Health Factor occupy three separate stages of the position. Mixing them produces the common mistake of treating maximum borrowing power as a maintenance boundary.

Loan-to-value limits how much new debt an account can create. The liquidation threshold sets the collateral percentage used in the solvency test. Health Factor then combines all eligible collateral through a value-weighted average threshold: total collateral value multiplied by that weighted threshold, divided by total borrow value. The follow-on topic is treated in Aave 101.

Beyond the basics, Aave V3 reserve percentages use basis-point encoding, where 10,000 basis points equals 100%. Health Factor uses 18-decimal WAD precision, so the contract represents 1 as 10 ¹⁸ units and 0.95 as 0.95 × 10 ¹⁸ . Efficiency Mode applies category parameters to qualifying assets. Isolation Mode restricts borrowing choices and debt capacity, yet liquidation eligibility still resolves through the account's Health Factor.

The 0.95 boundary and position-size close factor

The Aave V3 close factor limits the debt that one liquidation call can cover. It shifts between a default 50% account-level cap and up to 100% of the selected debt reserve under defined conditions.

In an eight-decimal USD-base Aave V3 pool, a Health Factor at or below 0.95, or a selected collateral or debt reserve value below $2,000, permits up to 100% of that debt reserve to be covered. Above 0.95, when both selected reserve values reach at least $2,000, the contract calculates 50% of the account's total debt value as the call's upper limit. A smaller selected debt reserve remains its own ceiling.

The stored size constant is 2,000 × 10 ⁸ for an eight-decimal USD base. The leftover constant is half of it: 1,000 × 10 ⁸ , corresponding to $1,000. A partial settlement must leave at least that much selected debt and collateral, or consume all debt or all collateral. Non-USD-base pools adjust these raw constants to their base currency. The 100% rule covers one chosen debt asset, not every debt reserve in the account at once.

Collateral transferred, bonus, and protocol share

The collateral-loss calculation starts with the value of debt actually covered. An Aave liquidation call converts that value into a quantity of one selected collateral asset, then applies its configured liquidation-bonus multiplier. Token prices and token decimals control the conversion; the bonus controls the extra collateral removed.

The percentage representation is fixed: 10,000 basis points denotes 100%, while 10,500 denotes a 105% multiplier and therefore a 5% gross bonus. Those numbers explain the encoding rather than state a live reserve setting. Aave Governance configures the actual liquidation bonus and liquidation protocol fee for each reserve or applicable Efficiency Mode category.

The protocol fee applies only to bonus collateral. It divides that bonus between the liquidator and the protocol treasury; it does not enlarge the borrower's gross collateral reduction. The liquidator chooses between 2 receipt paths: underlying collateral or its aToken representation. An aToken is an interest-bearing ERC-20 token. Choosing aTokens transfers the claim without redeeming the underlying asset during that step.

A worked Aave liquidation calculation

Hypothetical worked example. Every market- or governance-dependent input here is hypothetical: one account holds $12,000 of WETH as its only collateral, owes $9,800 of USDC, uses an 80% liquidation threshold, and faces a 5% liquidation bonus. Assume a 0% protocol fee, unchanged oracle prices, no additional interest during settlement, and no token-rounding difference.

The starting Health Factor is ($12,000 × 0.80) ÷ $9,800 = 0.9796. It is below 1 but above 0.95. Both selected reserve values exceed $2,000, so the default 50% close factor applies. The maximum debt covered is $9,800 × 0.50 = $4,900.

The gross collateral transferred is $4,900 × 1.05 = $5,145. That leaves $6,855 of collateral and $4,900 of debt. With every hypothetical input held constant, the new Health Factor is ($6,855 × 0.80) ÷ $4,900 = 1.1192. The concrete outcome is $4,900 less debt, $5,145 less collateral, and a $245 bonus component within the collateral loss.

Price feeds, interest accrual, and chain-specific monitoring

Health Factor monitoring follows three value groups: eligible collateral, its weighted liquidation threshold, and total debt. The Aave Oracle values both sides in the market's base currency. Configured sources commonly include Chainlink feeds and asset-specific adapters, so the decisive price is the protocol's oracle value rather than a single exchange quote.

Variable debt grows through the reserve's borrow index. Flat collateral prices therefore do not freeze Health Factor. Debt denominated in GHO, USDC, or DAI also changes the ratio when its oracle value moves against the base currency. A governance update to a liquidation threshold changes the numerator without moving either token price.

Markets remain chain-specific. Ethereum, Arbitrum, and Base each maintain separate collateral balances, debts, reserve parameters, and oracle state. One chain's surplus does not support another chain's borrow position. The Aave interface and tools such as DeFi Saver surface account metrics, yet the Pool contract's state at transaction execution decides eligibility.

From eligibility to settlement in one atomic call

The Aave liquidation call settles one debt asset against one collateral asset in 1 atomic transaction. Its Pool entry point has 5 external arguments: the collateral asset, debt asset, borrower address, debt amount to cover, and a Boolean selecting aToken receipt.

1. The caller acquires the selected debt token and gives the Pool an adequate ERC-20 allowance.
2. The Pool recalculates the borrower's Health Factor and validates both reserves.
3. The close-factor and dust rules cap the repayable debt.
4. The Pool burns the corresponding variable debt tokens and removes collateral.
5. Collateral reaches the liquidator as underlying tokens or aTokens, while any protocol fee reaches the treasury.

The transaction requires no borrower signature and no special liquidator role. If any validation fails, the entire call reverts and neither debt nor collateral changes. A successful call emits the liquidation event after balances settle. When all collateral is consumed while debt remains, V3 burns the remaining variable debt tokens and records the uncovered amount as a reserve deficit.

Restore the buffer before the boundary

Pre-liquidation repair changes either the Health Factor numerator or denominator before the account falls below 1. Two direct actions do that: add eligible collateral or repay debt. Supplying an asset without enabling it as collateral does not increase the numerator, while a submitted transaction changes nothing until the network includes it.

Reducing exposure also requires attention to the correct chain and reserve. Repaying USDC debt on Arbitrum does not alter an Ethereum position. Collateral swaps change the weighted liquidation threshold as well as price exposure, and Efficiency Mode remains useful only while the position satisfies its category rules. Automated repayment through DeFi Saver introduces its own transaction conditions, so the onchain Health Factor remains the final measurement.

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