Zaros Part 1

Summary

The absence of a utilization fee will lead to drastically reduced yield for LPs while exposing them to the same amount of risk from traders. This will deter LPs from using the protocol, which will bottleneck what traders can do.

Vulnerability Details

Because there is no utilization fee, there is no base cost for accessing leveraged funds. In a scenario where the skew was 0 (balanced), the open interest (OI) was at the maximum allowed, and the value of the index at T-0 was 10.00 and the value of the index at T-86400 was also $10.00. The traders would owe nothing. Even though all liquidity was borrowed constantly for a whole day, there would be no funding accruing and no PnL on either end. While this may seem unrealistic, it demonstrates that relying solely on funding fees is insufficient. If a market is balanced, the yield for the protocol or whoever is providing the liquidity would fall dramatically. Combined with a stable market, it would economically make no sense to provide liquidity to that market, which will bottleneck any trading there.

This is why it is important to include a utilization fee. If you look at Synthetix or GMX, you will see they incorporate such a fee for this very reason.

Impact

Loss of yield.

Tools Used

Manual analysis.

Recommendations

Utilization is already tracked; consider using these values to add utilization fees. GMX V2 and Synthetix provide great examples of this.