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Submission Details
Severity: high
Valid

Deposit Function Incorrectly Charges Fees to Liquidity Providers

nugen

[H-3] Deposit Function Incorrectly Charges Fees to Liquidity Providers

Description

The deposit function is intended to allow liquidity providers to deposit tokens and earn yield from flash loan fees. However, the current implementation incorrectly charges a fee when users deposit tokens.

The function calculates a fee based on the deposit amount and updates the exchange rate with this fee, effectively charging depositors for providing liquidity. This is the opposite of the intended behavior - depositors should receive AssetTokens representing their deposit plus future earnings, not pay fees upfront.

function deposit(IERC20 token, uint256 amount) external revertIfZero(amount) revertIfNotAllowedToken(token) {
AssetToken assetToken = s_tokenToAssetToken[token];
uint256 exchangeRate = assetToken.getExchangeRate();
uint256 mintAmount = (amount * assetToken.EXCHANGE_RATE_PRECISION()) / exchangeRate;
emit Deposit(msg.sender, token, amount);
assetToken.mint(msg.sender, mintAmount);
// @> Incorrectly calculates fee on deposits
uint256 calculatedFee = getCalculatedFee(token, amount);
// @> Updates exchange rate with deposit fee - penalizes depositors
assetToken.updateExchangeRate(calculatedFee);
token.safeTransferFrom(msg.sender, address(assetToken), amount);
}

Risk

Likelihood:

  • Every liquidity provider who deposits tokens is affected

  • The issue occurs on every deposit transaction

  • No special conditions or attacker actions are required

Impact:

  • Liquidity providers are charged fees instead of earning them, disincentivizing deposits

  • Protocol becomes uncompetitive as depositors lose value with every deposit

  • Exchange rate increases artificially with deposits, causing accounting issues

  • Early depositors subsidize later depositors through inflated exchange rates

  • Total value locked (TVL) remains low as rational actors avoid depositing

Proof of Concept

The following test demonstrates that depositors are charged fees:

function testDepositChargesFee() public setAllowedToken {
uint256 depositAmount = 100e18;
tokenA.mint(liquidityProvider, depositAmount);
​
vm.startPrank(liquidityProvider);
tokenA.approve(address(thunderLoan), depositAmount);
​
AssetToken assetToken = thunderLoan.getAssetFromToken(tokenA);
uint256 exchangeRateBefore = assetToken.getExchangeRate();
​
// Deposit tokens
thunderLoan.deposit(tokenA, depositAmount);
​
uint256 exchangeRateAfter = assetToken.getExchangeRate();
vm.stopPrank();
​
// Exchange rate increased due to "fee" charged on deposit
assertGt(exchangeRateAfter, exchangeRateBefore);
​
// Liquidity provider receives fewer AssetTokens than they should
uint256 expectedAssetTokens = depositAmount;
uint256 actualAssetTokens = assetToken.balanceOf(liquidityProvider);
assertLt(actualAssetTokens, expectedAssetTokens);
// Depositor lost value due to incorrect fee charge
}

Recommended Mitigation

Remove the fee calculation and exchange rate update from the deposit function. Deposits should not charge fees.

function deposit(IERC20 token, uint256 amount) external revertIfZero(amount) revertIfNotAllowedToken(token) {
AssetToken assetToken = s_tokenToAssetToken[token];
uint256 exchangeRate = assetToken.getExchangeRate();
uint256 mintAmount = (amount * assetToken.EXCHANGE_RATE_PRECISION()) / exchangeRate;
emit Deposit(msg.sender, token, amount);
assetToken.mint(msg.sender, mintAmount);
- uint256 calculatedFee = getCalculatedFee(token, amount);
- assetToken.updateExchangeRate(calculatedFee);
token.safeTransferFrom(msg.sender, address(assetToken), amount);
}
Updates

Lead Judging Commences

ai-first-flight-judge Lead Judge 11 days ago
Submission Judgement Published
Validated
Assigned finding tags:

[H-02] Updating exchange rate on token deposit will inflate asset token's exchange rate faster than expected

# Summary Exchange rate for asset token is updated on deposit. This means users can deposit (which will increase exchange rate), and then immediately withdraw more underlying tokens than they deposited. # Details Per documentation: > Liquidity providers can deposit assets into ThunderLoan and be given AssetTokens in return. **These AssetTokens gain interest over time depending on how often people take out flash loans!** Asset tokens gain interest when people take out flash loans with the underlying tokens. In current version of ThunderLoan, exchange rate is also updated when user deposits underlying tokens. This does not match with documentation and will end up causing exchange rate to increase on deposit. This will allow anyone who deposits to immediately withdraw and get more tokens back than they deposited. Underlying of any asset token can be completely drained in this manner. # Filename `src/protocol/ThunderLoan.sol` # Permalinks https://github.com/Cyfrin/2023-11-Thunder-Loan/blob/8539c83865eb0d6149e4d70f37a35d9e72ac7404/src/protocol/ThunderLoan.sol#L153-L154 # Impact Users can deposit and immediately withdraw more funds. Since exchange rate is increased on deposit, they will withdraw more funds then they deposited without any flash loans being taken at all. # Recommendations It is recommended to not update exchange rate on deposits and updated it only when flash loans are taken, as per documentation. ```diff function deposit(IERC20 token, uint256 amount) external revertIfZero(amount) revertIfNotAllowedToken(token) { AssetToken assetToken = s_tokenToAssetToken[token]; uint256 exchangeRate = assetToken.getExchangeRate(); uint256 mintAmount = (amount * assetToken.EXCHANGE_RATE_PRECISION()) / exchangeRate; emit Deposit(msg.sender, token, amount); assetToken.mint(msg.sender, mintAmount); - uint256 calculatedFee = getCalculatedFee(token, amount); - assetToken.updateExchangeRate(calculatedFee); token.safeTransferFrom(msg.sender, address(assetToken), amount); } ``` # POC ```solidity function testExchangeRateUpdatedOnDeposit() public setAllowedToken { tokenA.mint(liquidityProvider, AMOUNT); tokenA.mint(user, AMOUNT); // deposit some tokenA into ThunderLoan vm.startPrank(liquidityProvider); tokenA.approve(address(thunderLoan), AMOUNT); thunderLoan.deposit(tokenA, AMOUNT); vm.stopPrank(); // another user also makes a deposit vm.startPrank(user); tokenA.approve(address(thunderLoan), AMOUNT); thunderLoan.deposit(tokenA, AMOUNT); vm.stopPrank(); AssetToken assetToken = thunderLoan.getAssetFromToken(tokenA); // after a deposit, asset token's exchange rate has aleady increased // this is only supposed to happen when users take flash loans with underlying assertGt(assetToken.getExchangeRate(), 1 * assetToken.EXCHANGE_RATE_PRECISION()); // now liquidityProvider withdraws and gets more back because exchange // rate is increased but no flash loans were taken out yet // repeatedly doing this could drain all underlying for any asset token vm.startPrank(liquidityProvider); thunderLoan.redeem(tokenA, assetToken.balanceOf(liquidityProvider)); vm.stopPrank(); assertGt(tokenA.balanceOf(liquidityProvider), AMOUNT); } ```

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