How to use it
- Enter the units of collateral and today's CAD price per unit.
- Enter your debt in CAD (a stable-valued loan) and the borrow APR.
- Enter the lending protocol's liquidation threshold, maximum LTV, liquidation bonus and close factor.
- Choose a horizon in days for interest to accrue.
- Read the health factor, liquidation price and stress table, and test larger price drops.
Health factor and liquidation threshold
Lending protocols let you borrow up to a maximum loan-to-value (LTV), but liquidation is triggered by a separate, higher liquidation threshold. The health factor brings the two sides together: collateral value × liquidation threshold ÷ debt. Above 1.0 the loan cannot be liquidated; at or below 1.0, anyone can repay part of your debt and take some of your collateral at a discount.
The health factor is a ratio, so it moves with every price change. A reading of 1.60 means the collateral could fall 37.5% (1 − 1/1.60) before reaching 1.0, assuming the debt stays the same.
Worked example
Illustrative inputs: 2 units of a volatile asset at $4,000 each ($8,000 of collateral), $4,000 borrowed in a CAD-valued stable asset, an 80% liquidation threshold, a 75% maximum LTV, a 5% borrow APR over 365 days, a 5% liquidation bonus and a 50% close factor.
Interest matters more than it looks: a year at 5% raises the liquidation price by $125 per unit with no change in the market. The calculator uses simple interest; protocols that compound borrowing interest continuously would accrue slightly more.
| Measure | Result |
|---|---|
| Loan-to-value today | 50.0% |
| Borrowing limit at 75% maximum LTV | $6,000.00 ($2,000.00 of headroom) |
| Health factor today | 1.60 |
| Liquidation price per unit today | $2,500.00 (a 37.5% fall) |
| Debt after 365 days at 5% simple interest | $4,200.00 |
| Health factor after 365 days, same price | 1.52 |
| Liquidation price per unit after 365 days | $2,625.00 |
| Debt repaid in one liquidation (50% close factor) | $2,100.00 |
| Liquidation penalty (5% bonus) | $105.00 |
| Collateral seized at the liquidation price | 0.84 units |
Stress testing the collateral price
The stress table recalculates the health factor for a range of collateral price moves, holding today's debt constant. Volatile collateral can fall by these amounts quickly, and liquidations tend to cluster when many loans reach their thresholds at once, which can push prices lower still.
| Collateral price move | Health factor |
|---|---|
| +20% | 1.92 |
| 0% | 1.60 |
| −10% | 1.44 |
| −20% | 1.28 |
| −30% | 1.12 |
| −37.5% | 1.00 (liquidation can start) |
| −40% | 0.96 |
| −50% | 0.80 |
How liquidation works and what it costs
When the health factor drops below 1.0, a liquidator repays up to the close factor of your debt and receives collateral worth that repayment plus the liquidation bonus. In the example, a liquidation at the one-year liquidation price repays $2,100 of debt and takes 0.84 units, worth $2,205 at $2,625 each; the $105 difference is your penalty. Some protocols allow the whole debt to be liquidated when the health factor is very low.
The liquidation price assumes the debt is a stable asset worth one CAD per unit. If you borrow a USD stablecoin, the CAD/USD exchange rate also moves your position, and if the stablecoin itself depegs, the size of the debt changes. Liquidations depend on price oracles, and a faulty or delayed feed can trigger one at an unexpected price. See liquidation risk and oracle risk.
Canadian context
The Canadian Securities Administrators have cautioned that crypto-backed lending platforms may be trading or distributing securities that require registration and a prospectus, and that investors should check a platform's registration or exemptive relief. Decentralized lending protocols generally offer no Canadian registration, no complaint process and no deposit insurance; see regulation.
Borrowing is not a sale, but a liquidation sells your collateral, which can create a capital gain or loss to report. CRA also lists financing purchases with debt as one factor that can point toward business income; see capital vs business income.