❤️ Health Factor
As shown in the last section, the Chiss Protocol interest rate model is directly tied to the utilization rate. As utilization increases, the interest rate on the loan increases, often dramatically. It’s also connected to the loan position health factor. The higher interest rate causes the loan's total debt (principal + accrued interest) to grow much faster hence the loan’s Health Factor Decreases.
The Health Factor is calculated as:
Given the denominator, Total Debt Value, is increasing at a faster rate due to the increasing interest accrued, the Health Factor will decrease. The position becomes at risk of liquidation, as the Health Factor gets closer to or drops below the Health Factor liquidation Threshold.
It's a system of self-regulation where a borrower's own risk profile is directly influenced by the protocol's overall liquidity. This forces borrowers to constantly monitor their positions, especially in volatile market conditions where their collateral value might also be decreasing.
The self-regulating nature of the Chiss lending mechanism, where economic incentives and liquidation risks work in tandem to maintain protocol health and liquidity.