Recursive Lending Health Factor Distribution

Overview

A position's health factor tracks how close to liquidation it is. If the health factor is below 1, it can be liquidated therefore resulting in a loss to the borrower.

The Recursive Lending Health Factor Distribution tracks these values specifically for those rehypothecating their loans, or "looping", back into the protocol. Since this type of loan borrows and deposits the same asset, it can handle a much lower health factor without imminent liquidation risk, which is why there are two separate versions of this indicator.

This indicator is useful to analyze the different range of the protocol’s borrowers, if most of the supply has a low health factor, the solvency of the pool/protocol is at risk due to big liquidations.

How can I use it?

As explained with the “Health Factor” documentation, this indicator can provide insights into the liquidity risk of a DeFi lending protocol. It can point out early warnings for both depositors and liquidators which essentially allows users and investors to respond proactively.

For a decentralized finance (DeFi) protocol's recursive lending strategy to be profitable, token incentives must have a higher dollar value than borrowing costs. These incentives are often protocol tokens given as rewards to users, and protocols use this technique in order to attract further deposits/borrows. The sum of the deposit APR and rewards APR needs to be higher than the interest paid on the loan in order for the recursive lending strategy to be profitable.

Since recursive lending strategies use the same asset for these borrow loops, they can handle lower health factors with less risk than loans of one stable asset vs a volatile one. Therefore the thresholds for what is considered a risky recursive loan (shown in red to orange) is much lower than in this case.