Core Contracts
Regnum Aurum Acquisition Corp
HardhatReal World AssetsNFT
77,280 USDC
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Submission Details
Severity: high
Valid

Incorrect interest compounding in DebtToken::mint leads to over-inflated debt balances

0xwhyzee

Description

The DebtToken::mint function incorrectly includes accrued interest (balanceIncrease) in new debt token mints, creating a compounding error where interest is calculated on already-accrued interest. This occurs because:

  1. balanceOf() returns actual debt (scaled balance × current index)

  2. scaledBalance in mint operation uses this inflated value

  3. Subsequent interest calculations compound on the already interest-adjusted balance (e.g functions that update reverse interests before minting debt tokens like LendingPool::borrow)

Proof of Concept

  1. Initial Borrow

    • User borrows 100 tokens @ 1.0 RAY index

    • Actual debt: 100 × 1.0 = 100

    • Raw scaled balance: 100 (stored)

  2. Interest Accrual

    • Index increases to 1.1 RAY

    • Existing debt updates to: 100 × 1.1 = 110

  3. Second Borrow

  • User borrows another 100 tokens @ 1.1 RAY index

// Flawed calculation:
scaledBalance = balanceOf(user) = 110
balanceIncrease = 110 × (1.1 - 1.0) = 11
amountToMint = 100 (new) + 11 = 111

  • New debt: 110 + 111 = 221

Test case to demonstrate vulnerability:

In DebtToken.test.js, add this test and run npx hardhat test --grep "mints debt with compounded interest error"

it("mints debt with compounded interest error", async function () {
const initialAmount = ethers.parseEther("100");
const initialIndex = RAY;
​
// First borrow
await debtToken
.connect(mockLendingPoolSigner)
.mint(user1.address, user1.address, initialAmount, initialIndex);
​
// Increase index by 10%
const newIndex = (RAY * 11n) / 10n;
await mockLendingPool.setNormalizedDebt(newIndex);
​
// Second borrow with new index
const borrowAmount = ethers.parseEther("100");
await debtToken
.connect(mockLendingPoolSigner)
.mint(user1.address, user1.address, borrowAmount, newIndex);
​
// Expected: existing debt (100 * 1.1) + new debt (100 * 1.1) = 220
const expectedDebt = (initialAmount * 11n) / 10n + borrowAmount;
const actualDebt = await debtToken.balanceOf(user1.address);
​
// Actual debt incurred more than expected debt
// Actual=221e18 vs Expected=210e18
expect(actualDebt).to.be.gt(expectedDebt);
});

Impact

Critical Severity

  • Debt balances grow 5.2% faster than intended in this scenario (221 vs 210)

  • Compounding effect worsens with repeated borrows/rate changes

  • Protocol accounting becomes unreliable, risking insolvency

Recommendation

Option 1: Use raw scaled balances for interest calculation

- uint256 scaledBalance = balanceOf(onBehalfOf);
+ uint256 scaledBalance = super.balanceOf(onBehalfOf);
​
if (_userState[onBehalfOf].index < index) {
- balanceIncrease = scaledBalance.rayMul(index) - scaledBalance.rayMul(_userState[onBehalfOf].index);
+ balanceIncrease = scaledBalance.rayMul(index - _userState[onBehalfOf].index);
}

Option 2: Omit inclusion of balanceIncrease

- // Remove balanceIncrease calculation entirely
- uint256 balanceIncrease = 0;
- if (_userState[onBehalfOf].index != 0 && _userState[onBehalfOf].index < index) {
- balanceIncrease = scaledBalance.rayMul(index) - scaledBalance.rayMul(_userState[onBehalfOf].index);
- }
​
- uint256 amountToMint = amount + balanceIncrease;
+ uint256 amountToMint = amount;
Updates

Lead Judging Commences

inallhonesty Lead Judge 7 months ago
Submission Judgement Published
Validated
Assigned finding tags:

DebtToken::mint miscalculates debt by applying interest twice, inflating borrow amounts and risking premature liquidations

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