Health factor as collateral strength
In lending protocols like Aave and Compound, you deposit collateral and borrow assets against it. Your health factor is the ratio of your collateral value to your debt value, adjusted for liquidation thresholds. For example, if you deposit $10,000 ETH and borrow $5,000 USDC, and ETH has an 80% liquidation threshold, your health factor is (10,000 * 0.8) / 5,000 = 1.6.
A health factor above 1.0 means you are solvent. As your collateral price drops (or debt grows), the health factor declines. When it approaches 1.0, you are close to liquidation. At exactly 1.0, liquidators can seize your position, sell your collateral, repay your debt, and keep the difference as a liquidation penalty (typically 5-20%). The health factor curve is a sharp decline as collateral value drops: it is not linear because liquidation thresholds are fixed while asset prices move.
Why liquidations happen instantly
Liquidations are not gradual: the moment health factor crosses below 1.0, your position is vulnerable and liquidators (bots scanning the blockchain) immediately seize it. This is economically harsh but protects the protocol: if collateral could fall below required thresholds without liquidation, the protocol could accumulate bad debt (when collateral value is less than debt value, there is a hole in the balance sheet). Liquidations have no minimum transaction cost (gas fees are paid), so even small positions can be liquidated, though it is only economical for bots when liquidation penalties are large.