Automatic Return

Health Factor

The Health Factor is a metric that measures the stability of a borrowing position by comparing the value of the user's supplied assets to the value of their borrowed assets. A Health Factor below 1 indicates a risk of auto-return.

The Health Factor is calculated as follows:

＊Health Factor = (Total Supplied Asset Value＊Weighted Average Auto-return Threshold) ​/ Total Borrowed Asset Value

The health factor is a numerical representation of how secure the total value of supplied collateral assets is compared to the value of borrowed assets. It is directly influenced by the value of the collateral. When the collateral value increases, the health factor rises, indicating greater security. Conversely, when the collateral value decreases, the health factor drops, increasing the risk of an auto-return. If the health factor falls below 1, an auto-return may be triggered.

Example

A user supplies $10,000 worth of ETH (auto-return threshold: 70%) and $5,000 worth of WBTC (auto-return: 85%) as collateral, while borrowing $4,000 worth of USDT.

The Health Factor is calculated as follows:

Health Factor = ($10,000＊70% + $5,000＊85%) / $4,000 = 2.81

Auto-return Threshold

The Auto-Return Threshold is the point at which the collateral value becomes insufficient to cover the value of the borrowed assets, triggering the auto-return of the borrowed assets. The auto-return threshold is set differently for each asset and determines the collateral value required to maintain a position.

Auto-return occurs when the Loan-to-Value (LTV) ratio—calculated as the value of borrowed assets divided by the collateral value—reaches the auto-return threshold. For instance, if the auto-return threshold is set at 90%, automatic return is triggered when the LTV reaches 90%.

Example

Suppose a user supplies $10,000 worth of ETH (auto-return threshold: 90%) as collateral and borrows $8,500 worth of USDT.

＊Health Factor = $10,000*90%/$8,500=1.06

＊LTV = $8,500/$10,000*100=85%

Since the Health Factor is above 1 and the LTV is below the auto-return threshold (90%), no auto-return occurs in this scenario.

Auto-return

Auto-return Procedure

Auto-return occurs when the collateral value becomes insufficient to cover the value of the borrowed assets, causing the user's Health Factor to drop below 1. When this happens, the smart contract repays part or all of the user's collateral and uses it to restore the borrowed assets. During this process, an auto-return fee is applied, and the cost, including the fee, is deducted from the user's collateral.

The user's supply position after auto-return is calculated as follows:

＊Supply Position After Auto-return =Total Collateral−(0p;loRepaid Asset Value＊(1 + Auto-return Fee Rate))

Position Management Through Auto-return

Auto-return is designed to improve the user's Health Factor to 1 or above, ensuring a safer position. However, if the Health Factor becomes critically low, both the user's supply and borrowing positions may be completely closed.

Guide to Preventing Automatic Liquidation

As changes in the value of collateral and utilized assets directly affect the Health Factor, users must regularly monitor their positions to prevent the Health Factor from dropping below 1. If the collateral value decreases or the borrowed asset value increases, the user may exceed the auto-return threshold, causing the Health Factor to fall below 1 and triggering auto-return.

To avoid auto-return, users can:

1) Add more liquidity to increase the size of the collateral assets.

2) Restore part of the borrowed assets to lower the Health Factor.

Example of Auto-return

Assume a user supplies ETH as collateral and borrows USDT based on the supplied ETH.

The following conditions apply:

＊3 ETH = $10,000

＊ETH auto-return threshold = 90%

＊ETH MAX LTV = 85%

＊USDT auto-return fee = 5%

The user supplies 3 ETH ($10,000) and borrows up to $8,500 in USDT. In this scenario:

＊Health Factor = $10,000*90%/$8,500=1.06

＊LTV = $8,500/$10,000*100=85%

Since the Health Factor is above 1 and the position is below the auto-return threshold (90%), no auto-return occurs. However, if the threshold is exceeded, auto-return may be triggered.

Scenario: Collateral Value Decreases

If the price of ETH drops and the total collateral value falls to $9,000:

＊Health Factor = $9,000*90%/$8,500=0.95

＊LTV = $8,500/$9,000＊100= 94.44%

The Health Factor is below 1 and LTV exceeds the automatic liquidation threshold (90%), and automatic liquidation is triggered.

After Automatic Liquidation

If $4,250 worth of the borrowing position is auto-returned and the position changed as

＊Supply Position = $10,000 - ($4,250*1.05) = $5,537.5

＊Borroe Position = $8,500/2 = $4,250

＊Health Factor = $5,537.5＊90%/$4,250 = 1.17

＊LTV = $4,250/$5,537*100=76.74%

After auto-return, the Health Factor exceeds 1, and the LTV is below the auto-return threshold (90%), ensuring the remaining position is no longer subject to auto-return.