Summary

Chainlink recommends that all Optimistic L2 oracles consult the Sequencer Uptime Feed to ensure that the sequencer is live before trusting the data returned by the oracle. This check is missing in LiquidationPool.distributeAssets().

Vulnerability Details

The smart contracts will be deployed on any EVM chain which also includes L2 like Arbitrum. The issue here is, if the Arbitrum Sequencer goes down, oracle data will not be kept up to date, and thus could become stale. However, users are able to continue to interact with the protocol directly through the L1 optimistic rollup contract. You can review Chainlink docs on L2 Sequencer Uptime Feeds for more details on this.

Optimistic rollup protocols move all execution off the layer 1 (L1) Ethereum chain, complete execution on a layer 2 (L2) chain, and return the results of the L2 execution back to the L1. These protocols have a sequencer that executes and rolls up the L2 transactions by batching multiple transactions into a single transaction.

If a sequencer becomes unavailable, it is impossible to access read/write APIs that consumers are using and applications on the L2 network will be down for most users without interacting directly through the L1 optimistic rollup contracts. The L2 has not stopped, but it would be unfair to continue providing service on your applications when only a few users can use them.

However, this L2 Sequencer is missing in current implemetation which can be seen here,

As a result, users may be able to use the protocol while oracle feeds are stale. This could cause many problems, but as a simple example:

1)A user has an account with 100 tokens, valued at 1 ETH each, and no borrows

2)The Arbitrum sequencer goes down temporarily

3)While it’s down, the price of the token falls to 0.5 ETH each

4)The current value of the user’s account is 50 ETH, so they should be able to borrow a maximum of 200 ETH to keep account healthy ((200 + 50) / 200 = 1.2) Because of the stale price, the protocol lets them borrow 400 ETH ((400 + 100) / 400 = 1.2)

Impact

If the Arbitrum sequencer goes down, the protocol will allow users to continue to operate at the previous (stale) rates.

Tools Used

Manual Review

Recommendations

Use sequencer oracle to determine whether the sequencer is offline or not, and don't allow orders to be executed while the sequencer is offline.

Check the Chainlink Documentation for a full example: check here

Also check the queue system here