DittoETH

Summary

The market shutdown function will cause shorters to lose access to their collateral, even if they have a healthy position, which can lead to a death spiral.

Vulnerability Details

When the market is shut down, all shorters lose access to their collateral, even if they have a healthy position. This can cause that shorters with great amounts of funds can cause the loss of collateral to smaller shorters.

Imagine the following scenario:

• Asset price is 0.1 ETH

• Alice opens a short position of 2,000 assets at a price of 0.01 ETH with a collateral of 100 ETH (CR = 500%)

• Bob opens a short position of 200,000 assets at a price of 0.01 ETH with a collateral of 10,000 ETH (CR = 500%)

• A black swan event happens and the price of the asset increases to 0.051 ETH

• Alice increases her collateral to 510 ETH (CR = 500%)

• Bob does not increase his collateral, so the global collateralization ratio is 102% (10,510 / (0.051 * 202,000)), which is below the minimum collateralization ratio of 110%

• The market is shut down and both Alice and Bob lose access to their collateral, even though Alice had a healthy position

As we can see, Alice does not have any control over the outcome of her position, as she is at the mercy of Bob's actions. This will disincentive users from keeping healthy positions if they perceive the risk of failure in the bigger shorters.

Impact

Heavily undercollateralized shorts can cause smaller shorts with healthy positions to lose all their collateral. In the event that the price of the pegged asset increases drastically, this might discourage users from increasing their collateral in their short positions or keeping it active after increasing the collateral, which will in turn lead to a lower global collateralization ratio, entering a death spiral.

Tools Used

Manual inspection.

Recommendations

After market shutdown, allow shorters with a healthy position at the moment of the shutdown to close their position and receive part or the total of their collateral.