BENQI🔺 (@BenqiFinance): What actually makes a borrowing position "safe" in DeFi?

What actually makes a borrowing position "safe" in DeFi? Welcome to Freshman Questions, a BENQI educational series designed to make Avalanche and decentralized finance easier to understand for new users. 🔺 Borrowing against crypto can give you access to liquidity without requiring you to sell the assets you already own. But once you open a borrowing position, an important question follows: How do you know whether your position is still safe? On BENQI Markets, the answer is shown through a metric called Health or the Health Factor. Your Health Factor helps you understand how securely your loan is backed by collateral and how close your position may be to liquidation. It changes as asset prices move, debt accumulates interest, or you adjust the amount you have supplied or borrowed. Your Health Factor can also drop even if prices don't move, because the interest on your loan slowly adds to your debt over time - so a position left sitting near the limit could eventually be liquidated on just the interest alone. Understanding this number is one of the most important parts of borrowing responsibly in DeFi. Benqi makes it easy to understand the risk and avoid liquidation. What Is the Health Factor? The Health Factor is a numeric indicator of the safety of your collateralized borrowing position. It compares the borrowing power provided by your collateral with the value of your outstanding debt. In simple terms, it answers this question: Does your position still have enough collateral to support what you borrowed? A higher Health Factor generally means your position has a larger buffer before liquidation. A lower Health Factor means that buffer has become smaller. If your Health Factor falls below 1, your position becomes eligible for liquidation. This makes the Health Factor less like a credit score and more like a live risk gauge. It does not evaluate your identity, income, or repayment history. It evaluates the current relationship between your on-chain collateral and debt. Why Does BENQI Use a Health Factor? BENQI Markets allows users to borrow through overcollateralized loans. Before borrowing, a user must supply a supported asset and enable it as collateral. The amount that can be borrowed depends partly on the collateral factor assigned to that asset. Different assets may have different collateral factors because they do not all carry the same levels of volatility, liquidity, and market risk. The Health Factor brings the different parts of a borrowing position together into one understandable indicator. It accounts for factors such as: The value of supplied collateral The amount borrowed The risk parameters of the collateral Changes in asset prices Interest accumulating on the debt Because these inputs can change, the Health Factor can also change continuously. How Should You Read Health on BENQI? BENQI uses colors to make the condition of a borrowing position easier to understand. Health Above 2: Green A Health Factor above 2 is displayed in green. This indicates that the position has a relatively strong buffer between its current state and liquidation. It does not mean the position is risk-free. Crypto prices can move quickly, and a large decline in collateral value can still reduce Health. However, a higher value generally gives the borrower more room to absorb market movements. Health Below 1.99: Orange When Health falls below 1.99, the indicator turns orange. This is a caution signal. The position has moved closer to its liquidation threshold and may require closer monitoring. The borrower may choose to reduce debt or add collateral before conditions become more serious. Orange does not mean liquidation is occurring. It means the position has less protection against unfavorable price movements. Health Below 1.1: Red A Health Factor below 1.1 is displayed in red. At this point, the position is at high risk of liquidation. A relatively small change in collateral or borrowed-asset prices could push Health below 1. Borrowers in this range may need to act quickly to improve their position. Health Below 1: Liquidation When Health falls below 1, the position becomes eligible for liquidation. A liquidator can repay a portion of the outstanding debt and receive a corresponding amount of the borrower’s collateral, including a liquidation incentive. Liquidation helps protect lenders and maintain the solvency of the market, but it can result in the borrower losing collateral. That is why responsible borrowers generally aim to maintain a buffer rather than allowing Health to remain close to 1. A Step-by-Step Guide to Monitoring Health on BENQI Step 1: Connect Your Wallet Open BENQI Markets and connect a supported Avalanche wallet. The dashboard will display your supplied assets, borrowed assets, net position, and Health Factor. Step 2: Review Your Current Health Check both the numeric value and its color. A green position has a larger buffer. Orange signals caution. Red indicates that the position is approaching liquidation risk. Step 3: Review Health Before Every Action Before borrowing more or withdrawing collateral, review the projected Health shown by the interface. Do not evaluate the transaction only by whether BENQI allows it. Consider how much protection will remain afterward. Step 4: Consider Market Volatility Ask what would happen if your collateral fell sharply in value or your borrowed asset increased in price. A position that appears comfortable in calm conditions may become riskier during periods of volatility. Step 5: Take Action Before Health Reaches 1 If Health moves toward the red zone, consider repaying debt or adding collateral. Waiting until the position is immediately above 1 leaves little room for rapid price changes or delayed transactions. Step 6: Continue Monitoring the Position Borrowing is not necessarily a set-it-and-forget-it activity. Prices and interest continue to change after the loan is opened. Check the position regularly and maintain a plan for responding if Health declines. What Makes a Health Factor “Safe”? There is no single Health Factor that can guarantee a position will remain safe. A position with a higher Health Factor has a larger buffer, but all borrowing still involves risk. The appropriate buffer depends on factors such as: The volatility of the collateral The volatility of the borrowed asset The length of time the position will remain open The borrower’s ability to add collateral or repay debt Current market conditions The borrower’s personal risk tolerance Someone borrowing a stable asset against volatile collateral may want more room for the collateral price to fall. Someone who cannot monitor a position regularly may also prefer a larger buffer. The safer question is not: “What is the maximum amount BENQI will let me borrow?” It is: “How much can I borrow while leaving enough room for unfavorable market movements?” How Can You Improve Your Health Factor? If Health begins to decline, there are two primary ways to improve it. Add More Collateral Supplying and enabling additional collateral increases the value supporting the loan. This generally raises the Health Factor and creates more distance from liquidation. However, adding collateral also means putting more assets at risk if the position eventually becomes liquidatable. Repay Some of the Debt Repaying part or all of the borrowed amount reduces the outstanding debt. This generally improves Health without requiring the user to place more collateral into the position. A partial repayment may be enough to restore a more comfortable buffer. Why Health Matters for BENQI Users DeFi gives users direct access to lending and borrowing markets without a traditional loan application or centralized credit decision. That accessibility comes with responsibility. There may be no bank representative calling to ask for additional collateral before an on-chain position becomes liquidatable. The protocol follows its programmed rules, and market movements can affect a position at any time. The Health Factor gives borrowers visibility into that risk. It turns a complex combination of collateral values, debt balances, market parameters, and price movements into a single indicator that users can monitor. But it should be treated as a decision-making tool—not a promise that a position cannot lose value. Why This Matters Borrowing without selling can make crypto holdings more flexible and productive. An AVAX holder may be able to retain exposure to AVAX while borrowing another asset for liquidity. But that opportunity depends on keeping the loan sufficiently collateralized. Health is what connects borrowing power with borrowing responsibility. A higher Health Factor provides more room for market movement. A declining Health Factor warns that the position is becoming riskier. A value below 1 allows liquidation to begin. Understanding that progression helps BENQI users borrow more deliberately, respond earlier to changing conditions, and avoid treating the maximum available loan as a target. Next Step Before borrowing through BENQI Markets, explore how different borrowing amounts affect the projected Health Factor. Start below your maximum borrowing capacity, understand the volatility of both assets in the position, and decide in advance whether you would add collateral or repay debt if Health declined. For example, if you supply $1,000 of AVAX and borrow $400 of USDC, a 30% drop in AVAX shrinks your collateral to $700 while your debt stays at $400 - pushing your Health Factor down and closer to liquidation Responsible borrowing begins before the loan is opened. Got another Freshman Question you would like us to cover? Let us know! 🔺