What is Health Factor?

The health factor is a crucial concept in cryptocurrency lending, as explained in the AAVE documentation here and here.

Examples

Ordinals

1. Alice uses 1 ordinal with a floor price of 0.2 BTC as collateral to borrow 0.1 BTC.

2. This ordinals collection has a liquidation threshold of 80%.

3. Health Factor calculation: (0.2 * 0.8) / 0.1 = 1.6

4. Liquidation risk:

   • If the debt increases to 0.16 BTC, or

   • If the floor price of this ordinal drops to 0.125 BTC, the health factor will reach 1, allowing anyone to initiate an auction for this ordinal.

BTC/Runes

1. Alice uses 1 BTC (priced at $60,000 USD) as collateral to borrow $40,000 in StableCoins.

2. BTC has a liquidation threshold of 80%.

3. Health Factor calculation: (60,000 * 0.8) / 40,000 = 1.2

4. Liquidation risk:

   • If the debt increases to $48,000, or

   • If the price of BTC drops to $50,000, the health factor will reach 1, allowing anyone to liquidate this loan.

Unique Aspect of Bitty Bitcoin Lending

Unlike other platforms, Bitty bitcoin lending calculates the Health Factor (HF) on a per-collateral basis rather than a per-wallet basis. This is due to Bitcoin's lack of smart contract functionality, which prevents multi-asset liquidation in a single transaction (as provided by other swap protocols).

Key point: on Bitty v1.0, you cannot share margin between different collaterals, we will implement the BTC, Runes share margin first, and do the margin share for ordinals as well in the future.