DYAD - Bigsam's results

Lines of code

https://github.com/code-423n4/2024-04-dyad/blob/cd48c684a58158de444b24854ffd8f07d046c31b/src/core/VaultManagerV2.sol#L205-L227

Vulnerability details

Impact

The current design of the liquidate function in the VaultManagerV2 contract presents a decreased incentive for liquidation when the collateral ratio drops below 1.2, potentially leading to under-collateralized positions that may never be liquidated. By implementing an admin-based liquidation function, the protocol can address this issue effectively, ensuring the timely liquidation of under-collateralized positions and maintaining the contract's overall stability and security.

Proof of Concept

Introduction

The VaultManagerV2 contract includes a liquidate function designed to allow liquidators to repay the owed DYAD and receive the corresponding collateral worth of the DYAD plus a liquidation reward. https://github.com/code-423n4/2024-04-dyad/blob/cd48c684a58158de444b24854ffd8f07d046c31b/src/core/VaultManagerV2.sol#L215 However, the current design of the liquidation function becomes less rewarding when the collateral value drops below a ratio of 1.2, potentially reducing the incentive for liquidators to execute the liquidate function. This can lead to positions in the contract that may never be liquidated, affecting the contract's overall stability and security.

Issue Identification

Decreased Liquidation Incentive

The liquidate function calculates the liquidation equity share and asset share based on the capped collateral ratio (cappedCr):

https://github.com/code-423n4/2024-04-dyad/blob/cd48c684a58158de444b24854ffd8f07d046c31b/src/core/VaultManagerV2.sol#L217-L219

uint cappedCr = cr < 1e18 ? 1e18 : cr;
uint liquidationEquityShare = (cappedCr - 1e18).mulWadDown(LIQUIDATION_REWARD);
uint liquidationAssetShare = (liquidationEquityShare + 1e18).divWadDown(cappedCr);

When the collateral ratio (cr) drops below 1.2, the liquidation reward may not provide sufficient(max) incentive for liquidators to execute the liquidate function, leading to potential under-collateralized positions.

Liquidation Reward and Collateral Ratio

The liquidation reward is calculated as 0.2 * 1e18, which is added to the liquidation equity share. The total borrowed DYAD to collateral ratio is 1:1, and the amount paid represents the amount of DYAD owed. The amount on top of the DYAD owed is the liquidator's profit. However, when the collateral ratio drops below 1, there is a high possibility that a liquidator may not receive their full collateral based on the user's collateral, without any reward attached.

Tools Used

Manual code analysis.

Recommended Mitigation Steps

Implementation of Admin-Based Liquidation Role

To address the decreased incentive for liquidation when the collateral ratio drops below 1.2, the protocol should consider implementing an admin function or admin-based role to liquidate positions that fall below this threshold. This approach ensures that under-collateralized positions are addressed promptly, thereby maintaining the contract's overall stability and security.

Assessed type

Other