Health Factor

Max LTV is a useful way to examine a specific collateral / debt pair, but it doesn't work when the user has multiple collateral assets or debts. Because of this, we rely on a Health Factor to show users how close they are to liquidation.

Notional's Health Factor is similar to the health factor that users would see on a different money market like Aave. A user's health factor is the sum of the risk-adjusted value of their collateral assets divided by the sum of the risk-adjusted value of their debts.

$$Health Factor = \frac{\sum riskAdjustedCollateral} { \sum riskAdjustedDebt}$$

The Health Factor is infinity when the user has no debt and it is 1 when the user is at the point of liquidation. If the Health Factor goes below 1, the user can be liquidated.

Risk adjustments

Unlike other lending protocols, Notional has two kinds of risk adjustments - Asset type risk adjustments and exchange rate risk adjustments.

Asset type risk adjustments are applied to an asset depending on its type (Prime Cash, fCash, or nTokens) and exchange rate risk adjustments are applied depending on the asset's currency. Prime Cash and Prime Cash Debt have zero risk adjustment but fCash and nTokens do. This means that your Max LTV and Health Factor will be lower if you are borrowing against nETH as opposed to Prime ETH for example.