Aave liquidation is triggered at the Health Factor boundary

Keeping a WETH-backed position above the boundary

A WETH-backed Aave position stays outside liquidation eligibility while its Health Factor remains at or above 1. For a borrower using WETH collateral to draw USDC or GHO, the useful outcome is therefore a margin between the displayed factor and 1 that absorbs adverse collateral-price movement, debt-price movement, and continuing interest accrual.

Liquidation risk for an Aave position does not follow one universal "safe" Health Factor above that boundary. Correlated pairs such as wstETH collateral against WETH debt behave differently from WETH collateral against USDC debt, and V3 E-mode or a V4 Spoke changes the applicable parameters. Repaying debt raises the ratio by reducing its denominator; supplying eligible collateral raises the weighted numerator. Either action must settle on the correct chain and market before it changes eligibility.

V3 close factors and V4 target restoration

The Aave V3 close factor places a percentage ceiling on debt repaid in one liquidation, whereas the Aave V4 liquidation engine caps repayment at the amount required to reach a configured Target Health Factor. Both versions use Health Factor 1 as the eligibility boundary, but they size an eligible liquidation differently.

In V3, the 50% calculation uses total account debt value, although each call names one debt asset and one collateral asset and remains bounded by their available balances. In V4, the Target Health Factor is a Spoke parameter rather than a universal number, so the relevant value is the one attached to the borrower's exact Spoke.

Which numbers feed the Health Factor?

The Aave Health Factor combines oracle-valued collateral, a weighted liquidation threshold, and total debt into one solvency ratio. In V3, its durable formula is total collateral value multiplied by the weighted average liquidation threshold, divided by total borrow value.

Health Factor = collateral value × weighted liquidation threshold ÷ debt value

Each collateral asset contributes only if it is enabled for that account, and its contribution carries that asset's applicable threshold. The weighting prevents a small, high-threshold asset from setting the limit for an entire mixed portfolio. A value of exactly 1 marks the boundary; protocol validation accepts liquidation only below 1, while the interface may round the displayed number more coarsely than the contracts calculate it.

V4 preserves Health Factor as the eligibility metric but attaches collateral rules and the post-liquidation target to a Spoke. A borrower should read the account-level factor, not infer it from one collateral card, because other collateral, all outstanding debt, and the selected market configuration enter the account calculation.

Liquidation threshold and LTV are not interchangeable

The liquidation threshold determines when collateral no longer supports the debt, while loan-to-value, or LTV, limits how much debt an account opens against that collateral. Aave Governance configures both, but the Health Factor calculation uses the liquidation threshold rather than the maximum LTV.

A position may begin below its LTV limit and still move toward liquidation later as prices and interest alter the ratio. With multiple collateral assets, Aave applies a value-weighted threshold; adding collateral with a lower threshold may improve Health Factor less than the same base value of higher-threshold collateral. V3 E-mode replaces standard parameters for eligible combinations, and V4 applies the rules of the chosen Spoke.

How the collateral bonus becomes a borrower penalty

The liquidation bonus is the borrower's gross liquidation penalty viewed from the other side of the transfer: collateral worth more than the repaid debt leaves the account. In V3, the collateral or E-mode configuration supplies a static bonus multiplier. Percentage fields use basis-point precision, where 10,000 represents 100.00%; a multiplier of 10,500 therefore seizes 105.00% of the base collateral amount, a 5.00% gross bonus.

The liquidator does not necessarily retain that entire 5.00%. V3 calculates a liquidation protocol fee from the bonus portion, not from the collateral value that merely matches repaid debt, and transfers that fee to the treasury. The borrower's collateral reduction includes both the liquidator's net amount and the protocol fee (detailed in Aave checklist ).

V4 makes the bonus variable. Each collateral has a maximum liquidation bonus, while the Spoke defines a Health Factor for that maximum and a liquidation bonus factor that sets the reward near the eligibility line. The bonus rises as Health Factor falls through the configured range, then stops at the collateral's maximum; no single penalty percentage applies across all Aave markets.

E-mode and market boundaries change the inputs

Aave V3 E-mode substitutes category-specific collateral thresholds and liquidation bonuses when the account and selected assets qualify for that category. Category 0 is the reserved default, and the 8-bit category identifier permits values through 255; those identifiers label configurations rather than ranking their risk (more on this in Aave borrowing ).

The same token pair does not imply the same threshold everywhere. Ethereum, Arbitrum, Base, Optimism, and Polygon host separate Aave V3 deployments, each with its own reserves, oracle configuration, governance parameters, and transaction state. A WETH and USDC position on one deployment never combines with balances on another to produce a shared Health Factor.

Either way, Aave V4 moves this configuration boundary to Spokes connected with Liquidity Hubs. Aave Pro displays the relevant V4 Spoke and account metrics, while the Aave Labs V3 interface displays the chosen V3 market. Reading the version and market name first prevents a V3 close factor from being applied mentally to a V4 position.

Oracle updates and accrued interest move eligibility

During normal operation, Aave liquidation eligibility changes without a new borrower transaction because oracle valuations and variable debt accrual continually alter account data. Aave markets use configured price-oracle adapters, including Chainlink feeds for many listed assets, to express collateral and debt in a common base currency before calculating Health Factor.

Raw token balances are never compared directly. On EVM networks, USDC uses 6 decimal places, while WETH, DAI, and GHO use 18; the contracts normalize each balance by its token unit and oracle price. V3 represents the Health Factor with 18-decimal WAD precision, so the 0.95 close-factor boundary is encoded as 0.95 × 10 ¹⁸ , even when an interface shows fewer decimals.

Interest matters on the debt side. The variable borrow index increases the token amount owed, which enlarges the denominator even during a flat market. A collateral feed moving down, a debt-asset feed moving up, or accrued interest alone therefore pushes the ratio toward 1.

What happens inside an Aave liquidation transaction?

An Aave liquidation transaction is atomic: either the protocol completes its validated debt-and-collateral exchange or the transaction reverts. The V3 Pool call takes 5 explicit inputs - collateral asset, debt asset, borrower, debt amount to cover, and a Boolean selecting aToken or underlying collateral - then recomputes the position from onchain state.

1. The Pool updates reserve indexes and recalculates total collateral, total debt, and Health Factor.
2. Validation checks that Health Factor is below 1 and that the chosen reserves support the action.
3. V3 applies its 50% or 100% ceiling; V4 instead calculates debt needed for the Target Health Factor.
4. The contracts reduce debt tokens, remove collateral, allocate any protocol fee, and collect the repaid ERC-20 debt asset.
5. The protocol emits the liquidation record and records a reserve deficit if collateral reaches zero before all debt is covered.

Competition among liquidators affects who lands the transaction, not the borrower's threshold. A transaction constructed from an earlier block is revalidated against the execution block, so another repayment, another liquidation, an oracle update, or additional accrued interest changes the amount that succeeds.

Underlying collateral or aTokens?

The V3 collateral payout has 2 settlement paths: the liquidator selects underlying tokens or the corresponding aTokens. Choosing underlying burns the borrower's aTokens and transfers reserve assets; choosing aTokens transfers the interest-bearing claim itself, leaving redemption for a later action.

That choice does not alter the borrower's gross collateral seized under the configured bonus, although rounding and the protocol-fee allocation affect final token units. Receiving aTokens also exposes the liquidator to the reserve's withdrawal liquidity, because an aToken claim is redeemable only against available underlying. The Pool's LiquidationCall event records the repaid debt amount, liquidated collateral amount, liquidator, and payout selection.

Dust cleanup and reserve deficits

More broadly, Aave V3 dust rules enlarge or constrain liquidation amounts so tiny residual balances do not remain uneconomic to process. In a USD-denominated V3 pool using the default 8-decimal base unit, the maximum-close-factor size constant is 2,000 × 10 ⁸ , while the minimum permitted partial remainder is half of it, 1,000 × 10 ⁸ .

A partial V3 liquidation must therefore leave at least 1,000 base-currency units of both the chosen collateral and chosen debt, unless it clears one side completely. If either selected reserve value begins below 2,000 base units, the maximum close factor rises to 100%. Aave V4 hard-codes a 1,000 USD dust liquidation threshold for residual debt or collateral. V4 uses that constant to expand a requested full-clear liquidation when the ordinary Target Health Factor calculation would leave dust.

If collateral reaches zero while debt remains, V3 burns the borrower's remaining variable debt representation and records the uncovered amount as a reserve deficit. Aave Umbrella provides an automated deficit-coverage layer for supported asset-and-network pairs, but that accounting occurs after liquidation and does not restore collateral to the borrower.

Monitoring before eligibility arrives

By contrast, Aave liquidation monitoring should follow the account-level Health Factor, the active market or Spoke, collateral composition, and accrued borrow balance together. The Aave Labs V3 dashboard and Aave Pro surface the protocol metric, while DeFi Saver and DeFi Simulator provide independent automation or scenario tooling for supported positions.

Alerts are observational; they do not reserve transaction priority. A borrower who decides to add collateral or repay debt needs the corrective transaction confirmed on the same deployment before the execution block that first sees Health Factor below 1. Keeping network gas available matters because a prepared repayment that cannot be submitted changes nothing onchain.

Monitor the weaker side of the pair as well as headline collateral. WETH-backed USDC debt reacts differently from wstETH-backed WETH debt, and switching into E-mode or a V4 Spoke changes parameter inputs rather than erasing price, interest, and oracle timing risk. The version-specific dashboard remains the final readout for the position being managed.