Thunder Loan
AI First Flight #7
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Submission Details
Severity: high
Valid

deposit() calls updateExchangeRate() incorrectly, inflating exchange rate and diluting existing LPs

cybervikink

Root + Impact

Description

The issue

deposit() calls getCalculatedFee() on the deposited amount and passes the result to updateExchangeRate(). A depositor is not paying a flash loan fee — they are simply providing liquidity. Treating the deposit amount as a fee inflates the exchange rate on every single deposit, regardless of any lending activity. This incorrectly credits yield to the depositor at the expense of all existing LP holders.

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);
// @> Fee calculated on deposit amount — no flash loan occurred
uint256 calculatedFee = getCalculatedFee(token, amount);
// @> Exchange rate inflated on every deposit — not just on flash loan repayment
assetToken.updateExchangeRate(calculatedFee);
token.safeTransferFrom(msg.sender, address(assetToken), amount);
}

Risk

Likelihood:

  • Triggers on every single call to deposit() — no special conditions required

  • Any user depositing any allowed token causes this to fire

Impact:

  • Existing LP holders have their share value diluted on every new deposit — early LPs are penalised for new entrants

  • The exchange rate accounting diverges from reality over time, meaning redeem() calculations become increasingly inaccurate

  • A large depositor can artificially pump the exchange rate before redeeming to extract value from smaller LPs

Proof of Concept

function testDepositInflatesExchangeRate() public {
// Alice is the only LP — deposits 1000e18 tokens
vm.startPrank(alice);
token.approve(address(thunderLoan), 1000e18);
thunderLoan.deposit(IERC20(address(token)), 1000e18);
vm.stopPrank();
​
AssetToken assetToken = thunderLoan.getAssetFromToken(IERC20(address(token)));
uint256 rateAfterAlice = assetToken.getExchangeRate();
​
// Bob deposits 1000e18 tokens — no flash loan has occurred
vm.startPrank(bob);
token.approve(address(thunderLoan), 1000e18);
thunderLoan.deposit(IERC20(address(token)), 1000e18);
vm.stopPrank();
​
uint256 rateAfterBob = assetToken.getExchangeRate();
​
// Exchange rate increased purely from a deposit — incorrect
// No flash loan happened, but LPs are credited as if a fee was paid
assertGt(rateAfterBob, rateAfterAlice);
}

Recommended Mitigation

Remove the getCalculatedFee and updateExchangeRate calls from deposit(). Exchange rate updates must only happen inside flashloan() when a real fee has been collected:

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);
// @> Removed: getCalculatedFee and updateExchangeRate do not belong here
token.safeTransferFrom(msg.sender, address(assetToken), amount);
}
Updates

Lead Judging Commences

ai-first-flight-judge Lead Judge about 4 hours 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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