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Collateral needs room to breathe
Explain how falling collateral value can make a loan liquidatable.
The amount you owe can stay similar while the value protecting it falls.
A health factor is a moving ratio
Aave compares collateral value, weighted liquidation thresholds and debt value to calculate health factor. Below one, a position becomes eligible for liquidation. Asset prices and debt can change the ratio; a passing number when you open the loan is not a permanent safety margin.
Rules belong to the actual market
Read the collateral settings and liquidation rules for the exact deployment and asset. Liquidators repay eligible debt in return for collateral under the protocol's rules. Aave does not identify a universally safe health factor: volatility and how the assets move together matter.
Do the paper stress test
Use a fictional market: collateral value 1,000, threshold 80%, debt 500. These are teaching numbers, not current Aave parameters.
- Compute 1,000 × 0.8 ÷ 500 = 1.6.
- Let collateral value fall to 600. Compute 600 × 0.8 ÷ 500 = 0.96.
- Explain why the second scenario is eligible for liquidation under the rule in this lesson.
A loan can become dangerous without taking out any additional principal.
Learn the downside mechanism before considering a borrowing position.
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