What happens when your Health Factor finally drops below 1? We have already looked at how collateral, borrowing capacity, interest and the Health Factor interact. Now we get to the point where the position becomes stressed enough for the protocol to take action. Let's go back to the example from the previous posts. I have $10,000 worth of ETH supplied as collateral and $6,000 of USDC debt. My position starts with a Health Factor of around 1.33. Then ETH falls. At the same time, interest continues accruing on my debt. Eventually, the Health Factor can fall below 1. At that point, my position becomes eligible for liquidation. A liquidation is essentially a mechanism that allows another participant in the market to repay part of my debt in exchange for some of my collateral. Imagine I owe $6,000 USDC and my ETH position has become too risky. A liquidator can repay part of that USDC debt. In return, the liquidator receives ETH worth more than the amount of debt they repaid. That additional amount is the liquidation bonus. This incentive is important because the liquidator is providing a service to the protocol. The debt is reduced, collateral is removed from the risky position and Aave gets closer to having a fully collateralized system again. So the liquidator isn't simply taking someone's collateral. They are effectively acquiring collateral from a stressed position while repaying the debt attached to it. That creates an economic incentive to keep liquidations happening even when markets are moving quickly. In Aave V3, the amount that can be repaid during a liquidation is controlled by the close factor. In the standard case, a liquidator can repay up to a defined portion of the outstanding debt rather than necessarily closing the entire position. Imagine I have $10,000 of debt and the applicable close factor allows a 50% liquidation. A liquidator could repay up to $5,000 of that debt. But what if the position only needs $2,000 of repayment to move back into a much healthier state? The fixed close-factor approach doesn't specifically calculate the amount needed to restore the position. This is one of the areas where Aave V4 changes the design. Instead of relying on a fixed repayment percentage, V4 introduces a Target Health Factor. The liquidation engine can calculate how much debt needs to be repaid to move the position back toward that target. Imagine my Health Factor has fallen to 0.90 and the relevant Target Health Factor is 1.24. The system can determine the amount of debt that needs to be repaid to bring the position back toward that target rather than simply applying the same fixed percentage to every liquidation. V4 also changes the liquidation incentive itself. In V3, the liquidation bonus is configured as a relatively fixed parameter for the relevant asset and market. V4 introduces a dynamic liquidation bonus that changes depending on how far the position has deteriorated. A position that has only slightly crossed the liquidation threshold can therefore have a different incentive from a position that has become much more distressed. As the Health Factor deteriorates, the potential liquidation incentive increases. This creates a simple economic relationship: more risk → stronger liquidation incentive. V4 also introduces parameters such as the Target Health Factor, the Health Factor for Max Bonus and the Liquidation Bonus Factor to shape how this mechanism behaves for each risk configuration. And there is another small detail that matters more than it first appears, leftover debt. A liquidation can sometimes leave a very small amount of debt or collateral behind. V4 includes specific dust-liquidation logic so that these tiny residual positions can be handled instead of leaving economically insignificant pieces of debt sitting in the system. Putting everything together, the process becomes much clearer. My collateral provides the security. The debt represents what I owe. Interest can increase that debt over time. The Health Factor tracks how much room the position has. If the Health Factor falls below 1, the position becomes eligible for liquidation. A liquidator repays debt and receives collateral plus an incentive. And in V4, the liquidation is designed around restoring the position toward a target rather than simply applying a fixed repayment percentage. Liquidation therefore isn't just the final step of borrowing. It is part of the mechanism that allows Aave to keep lending safely while markets move, collateral prices change and debt accumulates. And once you look at it this way, one thing becomes especially important, someone has to decide what the collateral is actually worth. That brings us to one of the most critical pieces underneath the entire system, Aave's oracles.