Liquidation is Aave's backstop. If a loan is no longer covered by collateral under Aave's rules, someone else can repay part of the debt and take collateral, plus a bonus.
- Collateral (supplied tokens Aave may count)↓
- Borrow (debt that must be covered)↓
- Health Factor (threshold-adjusted collateral / debt)↓
- Price movement (oracle value of collateral or debt changes)↓
- Liquidation risk (HF near or below 1)
Why a falling collateral price reduces Health Factor
Health Factor uses USD values from Aave's oracle. If you collateralize with ETH and ETH's oracle price drops, the numerator shrinks. Debt in USDC may barely move. The ratio falls. You did not have to click anything.
Ronnie's bands versus Aave's line
- Healthy: HF 2 or higher. Wide cushion. Still not 'safe'.
- Watch (increasing risk): HF 1.5 to 2. Worth monitoring, especially if collateral is volatile.
- Risky (high risk): HF 1.15 to 1.5. A moderate adverse move can matter.
- Critical: HF below 1.15. Close to Aave's line.
- Liquidatable: HF below 1, which is Aave's eligibility line. The Liquidations tape shows when someone actually took the call.