Health Index HF: Health index is a function of total collateral assets and total borrowing funds, which is used to judge whether the account status is undercollateralized. The higher the index value, the lower the probability of liquidation, and the higher the security status of funds.
Before we understand the health index, we need to understand the concepts of [LTV] and [Liquidation Threshold].
LTV (Loan to Value): The ratio of the maximum borrowing amount to the specific collateral assets, which measures the maximum borrowing capacity based on the collateral asset.
For example, if the user deposits an ETH with a value of $10,000 and the LTV of ETH is 90%, then the user set ETH as the collateral asset and then can borrow other assets with a maximum value of $9,000 (10000x0.9).
Liquidation Threshold LT: The ratio of the total borrowed value to the value of collateral assets when the account is defined as undercollateralized. If the current ratio is lower than LT, it means the user's borrow limit exceeds the maximum borrowing capacity set by the system. Therefore, user's collateral assets will be frozen and then auctioned to alleviate the systemic risks caused by undercollateralized.
For example, the LT of 80% means that the liquidation will occur when the value of the borrowed asset exceeds 80% of the value of the collateral asset.
Generally speaking, in the fund pool lending mode, the user’s borrowable amount is the sum of the value of each deposit asset and the product of the maximum Loan-to-Value ratio (LTV), minus the current total debt, that is:
∑(Vdi*Fi) - ∑Vbj
Vdi: USD value of deposit asset i
Fi: Maximum Loan-to-Value ratio of deposit asset i
Vbj: Debt value of borrowed asset j
However, when users stake stable assets to borrow high-volatility assets, as long as the price of the borrowed assets rises faster, the borrower’s motivation to repay the loan will decrease, thereby increasing the risk of bad debts in the system. In order to solve this problem, we also consider the maximum Loan-to-Value ratio of the user’s borrowed assets, that is:
(∑(Vdi*Fi) - ∑(Vbj/Fj))*Fk
Fk: Maximum Loan-to-Value ratio of borrowed asset k
When the value of user deposit assets drops or debt rises, liquidation may be triggered. The health index is a numerical value that identifies the health of the account debt. When the health index is 1, the liquidation is triggered. In ForTube V2.0, the formula for calculating the health index is:
∑(Vdi*Fi) / ∑Vbj
ForTube V3 distinguishes the maximum Loan-to-Value ratio and the liquidation threshold. The liquidation threshold is a value slightly larger than the maximum Loan-to-Value ratio. Therefore, our health index calculation formula is modified as:
∑(Vdi*Li) / ∑(Vbj/Lj)
Lj: Liquidation threshold of asset j