Core Contracts

Summary

The current implementation of ZENO.sol incorrectly allows ZENO tokens to be redeemed at a fixed 1:1 ratio with USDC. This approach is flawed for two key reasons:

1. Decimal Mismatch – This issue has been raised separately, but it directly impacts the redemption process.

2. Zero-Bond Pricing Model Ignored – ZENO tokens are intended to function as zero-coupon bonds, meaning they should be purchased at a discount and redeemed at a nominal value upon maturity. However, the current system fails to account for this, effectively forcing users to purchase ZENO at a premium rather than a discount.

Vulnerability Details

According to the documentation, ZENO tokens act as zero-coupon bonds, meaning: (the value is just an example)

• Users buy ZENO at a discount (e.g., 1 ZENO costs 3000 USDC).

• Upon maturity, the bondholder should receive the nominal value (e.g., 3500 USDC for 1 ZENO).

However, the current logic does not reflect this structure. When a user purchases ZENO through the buy(...) function in Auction.sol, the cost is calculated as:

This amount of ZENO is minted and held by the user. However, when the user redeems their ZENO in ZENO.sol, the contract incorrectly assumes a 1:1 exchange rate with USDC:

Issues with This Implementation:

• Incorrect Pricing Model – Users are paying amount * price in USDC but only receiving amount USDC upon redemption, meaning they are effectively paying a premium instead of receiving a discounted bond.

• No Maturity Value Adjustment – The function does not adjust for the intended increased value upon redemption. The zero-bond logic is entirely missing.

• Decimal Issues – The 18-decimal ZENO token and 6-decimal USDC further exacerbate the problem.

Impact

• Users lose money when purchasing ZENO because they are effectively paying more than they receive.

• The zero-bond logic is completely broken, making the system unusable as intended.

• The contract fails to reflect the promised discounted purchase and maturity payout model.

Tools Used

N/A

Recommendations

• Implement a proper pricing mechanism in the redeem(...) function to ensure that ZENO is redeemed at its maturity value rather than a 1:1 rate.

• Adjust calculations to properly account for decimal mismatches between ZENO and USDC.

• Introduce a time-based maturity scaling mechanism to ensure ZENO holders receive the expected nominal value upon redemption.