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 Health Factor Distribution indicator shows the share of borrowers within a particular range of health factors, excluding recursive loans and bad debt.

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.

In the case that the protocol incurs bad debt, affected positions are taken out of the Health Factor Distribution indicator and can continue to be tracked under the Open Liquidations indicator. Following the Nomad hack in August 2022, Moonwell on Moonbeam saw the health factor of several positions drop below 1 as .mad assets were no longer backed.

How can I use it?

This indicator presents useful information both for depositors and liquidators. The greater the amount of loans at risk of liquidation the riskier it becomes for depositors to supply money into the protocol. For liquidators it can be beneficial to analyze during times of market volatility in order to try and anticipate where big liquidations could happen.

Moreover, a more evenly distributed range of health factors indicate that the loans within the protocol are more decentralized across borrowers, making it less likely for all of them to be liquidated at once.

A protocol with a high health factor distribution can be more secure for depositors as there is lower likelihood of massive liquidations, which at times may be unprofitable for liquidators due to slippage on DEXs. Therefore, high health factors should make depositors more comfortable with their positions.