The Standard

Description

Currently, LiquidationPool holders get the right to purchase rewards at a discounted price based on their stake. Considering that:

We can see that the purchasing power depends on position[holder].EUROs, but the purchase right relies on min(position[holder].TST, position[holder].EUROs). If , then the holder will adjust their purchase to a proportional amount. The portion of the right that they cannot buy due to a lack of funds is sent to LiquidationPoolManager.protocol, and the EUROs paid are burned.

As long as the price of EUROS > price of TST in the market, it is logical to expect that positions will tend to have fewer EUROS than TST. Consequently, fewer assets will be forwarded to LiquidationPoolManager.protocol.

However, if the opposite occurs, more assets will be sent to LiquidationPoolManager.protocol, and fewer EUROS will be burned in each liquidation, even though there are enough EUROS to burn in response to a liquidation.

Moreover, if assets forwarded to the protocol experience a sharp price decrease at a given moment, the peg mechanism will be completely broken because:

• Minting EUROs for a value lower than the collateral someone has committed is not smart.

• Buying as many EUROS from a DEX as possible to increase our position and receive a larger share of distributed assets in each liquidation will not benefit us, given that min(position.TST, position.EUROs) determines reward distribution. Hence, buying more EUROS doesn't make sense if we don't buy same amount of TST.

• The only actor incentivized to buy more EUROS from a DEX would be a user with a vault about to be liquidated.

Trusting the peg mechanism solely on the last point is insufficient because the protocol assumes that actors will be monitoring their positions 24/7 to make the smartest moves, whereas, in reality, this rarely happens

Impact

When TST price > 1 EURO, there is a greater risk of breaking the EUROs peg mechanism.

Recommended mitigation

To reduce this risk, it would be better to use the entire position.EUROS for asset distribution. This way, the protocol maximizes the amount of EUROS to be burned in each liquidation. To incentivize an increase in TST price, a fixed minimum amount of this token could be required for a position to qualify for asset distribution