Parameters

Health Factor (HF)

The Health Factor serves as a visual indicator of your borrow position's stability, depicted by a spectrum spanning from green (100%) to red (0%). When your Health Factor reaches the critical threshold of 0%, it triggers the initiation of the liquidation process. This metric is determined in real-time, taking into account your borrow-to-collateral ratio and the specific Liquidation Threshold set for the asset you've borrowed against.

$HF= 1-{LTV \over LiquidationThreshold}$

Several factors can contribute to your Health Factor approaching the perilous 0% mark, including:

1. The value of your collateral diminishes.

2. You withdraw a portion of your collateral.

3. Additional borrowing activity on your part.

4. Accumulation of interest on your loan over time.

The closer your Health Factor gets to 0%, the nearer you are to facing liquidation. It's essential to vigilantly monitor the Health Factor of each of your borrow positions to ensure their stability and avoid potential liquidation.

Loan-To-Value (LTV)

The max LTV figure on each pool respresents the maximum amount of debt as a user can borrow against their collateral

$LTV = {BorrowValue \over CollateralValue}$

Liquidation Threshold (LT)

The liquidation threshold is a critical parameter in Tren Finance, determining the maximum value that your loan can reach before your collateral becomes eligible for liquidation. Each asset within the protocol has its own ratio for this threshold, and this ratio is established through governance decisions.

When a position gets liquidated closer to the threshold, liquidators are rewarded with a higher liquidation fee. This incentive structure is in place to encourage quick action in liquidating positions that approach or exceed the Liquidation Threshold. If borrowers were allowed to accumulate debt beyond the value of their collateral, it would lead to a state of under-collateralization. This scenario is problematic because it increases the risk of bad debt accumulating within the pool, which can have adverse consequences for the protocol

Maximum Liquidation Fee (MLF)

The Maximum Liquidation Fee represents the highest proportion of your collateral that can be at risk in the event of a liquidation. This is the discount a liquidator can obtain when buying collateral flagged for liquidation. The fee incentivizes the liquidator for taking the risk of buying the collateral and is set by governance to cover costs such as slippage and gas fees.

$MLF = 1 -LT$

As a borrower's borrow-to-collateral ratio surpasses the liquidation threshold, the liquidation fee they receive diminishes. The Liquidation Fee acts as a motivating factor for liquidators to promptly liquidate positions as soon as they are flagged for liquidation, with the overarching aim of averting the accumulation of bad debt.