Health and intuition

We'd love to give you some quick math and simple examples on the health meter. The quickest math would be; the higher the leverage, the lower your health percentage. It does not directly imply how risky your strategy is though. This depends on a bunch of factors and market movements. Instead, we'd much rather give you the insights on understanding the health meter.

How to interpret the health meter

Borrowing Power	Collateral Value	Borrowed Value	Health Meter
10x	$100	$500	50%
5x	$120	$250	58.3%
3x	$100	$101	66.3%

Let's have a look at the first and last row in the Asset Health table above:

Having 10x borrowing power, with $100 in collateral, means you could theoretically borrow up to $1000 before getting liquidated. If you would borrow $500, exactly half of that, your health would instead be 50%. If you use the same $100 as collateral for an asset with 3x borrowing power, you would be able to borrow up to a maximum of $300. If you borrow $101, a little over one-third of your max borrowed amount, your health meter will drop to 66.3%, a little under two-third of your health.

Combining assets, the token price, and differences in borrowing power are taken into account, yet the basic idea stays the same: Your health meter represents the percentage of the value that you can borrow based on your collateral. If you have 60% health, that means that you have borrowed a total value of 40% of what you can borrow with your current collateral. A health meter of 0% means liquidation.

Of course, your collateral value changes, as this is based on your account value minus your total borrowed value. Through investments and trades, your account value might go up and down. If your investments make you a $20 profit in the first scenario, this will automatically be counted towards your collateral, increasing this to $120. This would increase your Asset health to 58.3%.

If you instead make unprofitable investments, dropping your total account value by $50, your collateral would be worth $50 with the same $250 borrowed value. That hits the 5x bringing your health to 0%. At this point positions in your Prime Account will be partially liquidated to automatically repay part of your borrowed funds.

An additional parameter that affects the predictability of the health ratio is the borrowing power of the tokens you are holding or borrowing. Depositing a 1x token and borrowing a 5x token, means you can borrow up to 3x the value of your collateral before hitting 0%. Depositing a 5x token and borrowing a 1x token means you can borrow up to 1.67x the value before hitting 0%. The reason for this is that borrowing an asset integrates that asset as part of your collateral, changing your total asset allocation in the process, and thus impacting your overall borrowing power. One way to avoid this is by swapping your borrowed tokens into the 5x token, improving the health meter with every swap. If you were to do this consistently, you would eventually have 5x borrowing power on your portfolio.

Indicator

The health meter is an indicator; A tool that helps you evaluate your current portfolio. That being said, having low health does not directly translate into high liquidation risk. A portfolio with 2% health, where your collateral is the same token as the borrowed tokens, has no liquidation risk. The liquidation risk severely increases if you trade your assets for tokens with low correlation to the borrowed tokens.

For this reason, managing your portfolio as a borrower is paramount. How you do that, that is totally up to you, the possibilities are endless. To get the most out of your risk management, make sure to collaborate and engage with the community of DegenPrime.