Submission Details
Severity:
When bad debt is accumulated the loss is not distributed amongst all suppliers leading to a huge loss for the last supplier to withdraw
Summary
When bad debt accumulates, it should be socialized among all suppliers to distribute the loss fairly.
However, the protocol fails to do this, causing only the last users to withdraw to bear the full impact of the bad debt. Early withdrawers suffer no loss, while the last to withdraw face severe losses.
Vulnerability Details
The withdrawn assets is calculated as shares * liquidityIndex which does not take into account bad debt.
This means that even if bad debt accrues, the first users to withdraw will be able to withdraw their shares to assets at a good rate, leaving the last users with all the loss.
PoC
import { expect, use } from 'chai';
import hre from "hardhat";
const { ethers } = hre;
describe("RAAC PoC", function() {
let owner, user1, user2, user3;
let crvusd, raacNFT, raacHousePrices;
let lendingPool, rToken, debtToken;
let token;
beforeEach(async function () {
[owner, user1, user2, user3] = await ethers.getSigners();
const CrvUSDToken = await ethers.getContractFactory("crvUSDToken");
crvusd = await CrvUSDToken.deploy(owner.address);
await crvusd.setMinter(owner.address);
token = crvusd;
const RAACHousePrices = await ethers.getContractFactory("RAACHousePrices");
raacHousePrices = await RAACHousePrices.deploy(owner.address);
const RAACNFT = await ethers.getContractFactory("RAACNFT");
raacNFT = await RAACNFT.deploy(crvusd.target, raacHousePrices.target, owner.address);
const RToken = await ethers.getContractFactory("RToken");
rToken = await RToken.deploy("RToken", "RToken", owner.address, crvusd.target);
const DebtToken = await ethers.getContractFactory("DebtToken");
debtToken = await DebtToken.deploy("DebtToken", "DT", owner.address);
const RAACToken = await ethers.getContractFactory("RAACToken");
const raacToken = await RAACToken.deploy(owner.address, 100, 50);
const DEToken = await ethers.getContractFactory("DEToken");
const deToken = await DEToken.deploy("DEToken", "DEToken", owner.address, rToken.target);
const initialPrimeRate = ethers.parseUnits("0.1", 27);
const LendingPool = await ethers.getContractFactory("LendingPool");
lendingPool = await LendingPool.deploy(
crvusd.target,
rToken.target,
debtToken.target,
raacNFT.target,
raacHousePrices.target,
initialPrimeRate
);
await lendingPool.setStabilityPool(owner.address);
await rToken.setReservePool(lendingPool.target);
await debtToken.setReservePool(lendingPool.target);
await rToken.transferOwnership(lendingPool.target);
await debtToken.transferOwnership(lendingPool.target);
// mint tokens to users
const mintAmount = ethers.parseEther("1000");
await crvusd.mint(user1.address, mintAmount);
await crvusd.mint(user2.address, mintAmount);
await crvusd.mint(user3.address, mintAmount);
await crvusd.mint(owner.address, ethers.parseEther("800"));
await crvusd.connect(user1).approve(lendingPool.target, mintAmount);
await crvusd.connect(user2).approve(lendingPool.target, mintAmount);
await crvusd.connect(user3).approve(lendingPool.target, mintAmount);
// set house prices
await raacHousePrices.setOracle(owner.address);
await raacHousePrices.setHousePrice(1, ethers.parseEther("500"));
await raacHousePrices.setHousePrice(2, ethers.parseEther("500"));
await ethers.provider.send("evm_mine", []);
// mint NFTs to user1
const tokenId = 1;
const amountToPay1 = ethers.parseEther("500");
const amountToPay2 = ethers.parseEther("500");
await token.mint(user1.address, amountToPay1 + amountToPay2);
await token.connect(user1).approve(raacNFT.target, amountToPay1 + amountToPay2);
await raacNFT.connect(user1).mint(tokenId, amountToPay1);
await raacNFT.connect(user1).mint(tokenId + 1, amountToPay2);
// suppliers deposits assets into the lending pool
const depositAmount = ethers.parseEther("1000");
await crvusd.connect(user2).approve(lendingPool.target, depositAmount);
await lendingPool.connect(user2).deposit(depositAmount);
await crvusd.connect(user3).approve(lendingPool.target, depositAmount);
await lendingPool.connect(user3).deposit(depositAmount);
await ethers.provider.send("evm_mine", []);
expect(await crvusd.balanceOf(rToken.target)).to.equal(ethers.parseEther("2000"));
});
it("does not distribute the loss among all suppliers during bad debt", async () => {
// borrower provides collateral (1000e18)
const tokenId1 = 1;
const tokenId2 = 2;
await raacNFT.connect(user1).approve(lendingPool.target, tokenId1);
await lendingPool.connect(user1).depositNFT(tokenId1);
await raacNFT.connect(user1).approve(lendingPool.target, tokenId2);
await lendingPool.connect(user1).depositNFT(tokenId2);
// borrows 800e18 (ltv = 80%)
await lendingPool.connect(user1).borrow(ethers.parseEther("800"));
// the borrower's collateral drops by 40% in value (ltv = 120%) => extremely unhealthy ltv | low health factor
await raacHousePrices.setHousePrice(1, ethers.parseEther("300"));
await raacHousePrices.setHousePrice(2, ethers.parseEther("300"));
// liquidate borrower
await lendingPool.initiateLiquidation(user1.address);
// increase time by 3 days
await ethers.provider.send("evm_increaseTime", [72 * 60 * 60 + 1]);
await ethers.provider.send("evm_mine");
// finalize liquidation | the stability pool does not have enough assets to cover the bad debt
// using the owner as stability pool for simplicity
await expect(lendingPool.connect(owner).finalizeLiquidation(user1.address))
.to.be.revertedWithCustomError(crvusd, "ERC20InsufficientAllowance");
// the protocol is now suffering from bad debt accrual => suppliers withdraw their assets
await lendingPool.connect(user2).withdraw(ethers.parseEther("1000"));
// the last supplier to withdraw faces the full impact of the bad debt
await expect(lendingPool.connect(user3).withdraw(ethers.parseEther("1000")))
.to.be.revertedWithCustomError(crvusd, "ERC20InsufficientBalance");
console.log("User1 balance: ", await crvusd.balanceOf(user2));
console.log("user2 balance: ", await crvusd.balanceOf(user3));
});
});
Output
RAAC PoC
User1 balance: 1000000000000000000000n
user2 balance: 0n
✔ does not distribute the loss among all suppliers during bad debt (5553ms)
1 passing (25s)
Impact
-
Severe fund loss for the last users to withdraw.
-
Early withdrawers profit at the expense of late withdrawers.
-
Unfair distribution of risk, reducing protocol trust and stability.
Tools Used
Manual Reseach, VSCode
Recommendations
Ensure bad debt is proportionally distributed among all depositors rather than concentrated on the last to withdraw.
Updates
Lead Judging Commences
inallhonesty 7 months ago
Submission Judgement Published Assigned finding tags:
LendingPool vulnerable to bank run as first-come-first-served withdrawal model lacks loss socialization, allowing early withdrawers to escape while late ones bear losses
inallhonesty 7 months ago
Submission Judgement Published Assigned finding tags:
LendingPool vulnerable to bank run as first-come-first-served withdrawal model lacks loss socialization, allowing early withdrawers to escape while late ones bear losses
Prize pool breakdown
Total prize
77,280 USDC
nSLOC
3,86420
USDC / LOC
74,000
3,280
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