Root + Impact

Description

The liquidate() function calculates the collateral to seize from a borrower based on:

• The debt being repaid

• The liquidation bonus

However, there is no validation ensuring that:

If the calculated collateral_to_seize (including liquidation bonus) exceeds the borrower’s actual deposited collateral, the liquidation attempt will revert.

This creates a scenario where undercollateralized positions become unliquidatable, breaking a core stability mechanism of the protocol.

Risk

Likelihood: High

• Reason 1 Happens during sharp market volatility.

• Reason 2 Common in oracle-based liquidation systems.

• Reason 3 Especially possible with high liquidation bonuses.

Impact: High

• Impact 1 Prevents liquidation.

• Impact 2 Allows toxic debt to remain.

• Impact 3 Can cause systemic insolvency.

• Impact 4 Breaks protocol core invariant.

Proof of Concept

Expected behavior:
Liquidation should succeed and seize up to available collateral.

Actual behavior:
Liquidation reverts entirely.

Recommended Mitigation

1. Cap Seizable Collateral

Modify liquidation logic:

This ensures:

*Liquidation always executes

*No revert due to over-seizure

*Protocol captures maximum available value

2.Adjust Debt Accounting

If full debt cannot be covered due to insufficient collateral:

Burn only proportional debt

Or track remaining bad debt explicitly.

3.Defensive Programming

At the external boundary:

And internally:

Design Principle Reminder

Liquidation must:

• Never revert for arithmetic reasons

• Never assume sufficient collateral

• Always preserve solvency over strict bonus rules

Liquidation logic must prioritize protocol survival.

Conclusion:

This issue allows unhealthy positions to become permanently unliquidatable when liquidation bonus pushes seized collateral above user balance.

That:

• Breaks protocol core invariant

• Threatens stablecoin backing

• Introduces systemic insolvency risk

Fixing this requires capping collateral seizure to available balance and adjusting debt settlement accordingly.