Summary

The protocol fails to factor in the liquidation fee when checking if an account is liquidatable.

Vulnerability Details

The protocol fails to factor in the liquidation fee when checking if an account is liquidatable. At the point where the liquidation status of an account is checked, the protocol compares the required margin, requiredMaintenanceMarginUsdX18 , to the margin balance, ctx.marginBalanceUsdX18.

If the requiredMaintenanceMarginUsdX18 is greater than the marginBalanceUsdX18 of the account, the account is liquidated.
However, considering that the protocol takes a liquidation fee from the collateral balance of the liquidated account, the fee should be factored into the isLiquidatable(). Otherwise, we end up in a situation where either the liquidation fee recipient or the collateral recipient will be short of what they are supposed to receive after each liquidation.
In the case of Zaros, the liquidation fee recipient is fully compensated as they are first paid before the rest of the collateral assets are sent to the collateral recipient.
See here for how the liquidated collateral is distributed.

Impact

Loss of collateral asset for the collateral recipient.

Tools Used

Manual

Recommendations

Factor in the liquidation fee when checking if an account is liquidatable.