Steadefi

Summary

The calculations in the Delta Long and Delta Neutral strategies are incorrect, overestimating potential gains and underestimating potential losses.

Vulnerability Details

An LP position must retain a constant product. If we assume (as in the example) that one LP token is made from 0.5 USDC and 0.0005 ETH ($0.50 worth at a price of $1000), then the constant product for each token is 0.00025:
k = (USDC amount) * (ETH amount) = 0.5 * 0.0005 = 0.00025
The ratio of the token amounts in the LP also reflect the price:
price = (USDC amount)/(ETH amount) = 0.5/0.0005 = $1000 per ETH
Each LP token is worth $1, because it contains $0.50 worth of USDC and $0.50 worth of ETH (0.0005 at $1000).

If ETH increases in price by 50% (to $1500), then the amount of USDC in one LP token must be 0.6124, and the amount of ETH must be 0.0004082 because:
0.6124 * 0.0004082 = 0.00025 = k (must retain this constant product)
0.6124/0.0004082 = 1500 = price (reflecting the price increase of 50%)
This means that each LP token is now worth $1.2248, because it contains $0.6124 worth of USDC and $0.6124 worth of ETH (0.0004082 at $1500). This is an increase in value of 22.5%, not 25% as stated in the documentation.

If ETH decreases in price by 50% (to $500), then the amount of USDC in one LP token must be 0.3535, and the amount of ETH must be 0.000707 because:
0.3535 * 0.000707 = 0.00025 = k (must retain this constant product)
0.3535/0.000707 = 500 = price (reflecting the price decrease of 50%)
This means that each LP token is now worth $0.707, because it contains $0.3535 worth of USDC and $0.3535 worth of ETH (0.000707 at $500). This is a decrease of 29.3%, not 25% as stated in the documentation.

Impact

These hedged strategies are the main selling point for users to adopt Steadefi, so accuracy in presented outcomes is important. The current documentation misleads readers about the potential gains and losses they may achieve using the platform.

Tools Used

A calculator.

Recommendations

I would correct the errors using the correct calculations. It might also be good to create a site where users can run simulations with the different strategies to see even more outcomes. For example, what would my net profit be if I put $100 on a 5x long delta position and ETH goes up 4.2x? I would be happy to further walk through the calculations if you would like.