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

deposit() incorrectly calls updateExchangeRate, inflating the exchange rate on deposits and breaking redemptions / protocol solvency

bytethebuilder

Root + Impact

Description

In a yield-bearing vault, the exchange rate (underlying per asset token) should only increase when the protocol earns fees (on flash loans). A plain deposit is NOT income - it adds underlying AND mints a proportional amount of asset tokens, so the rate must stay unchanged.

But ThunderLoan.deposit() wrongly bumps the exchange rate on every deposit:

function deposit(IERC20 token, uint256 amount) external ... {
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); // deposits are not fees!
token.safeTransferFrom(msg.sender, address(assetToken), amount);
}

updateExchangeRate(fee) raises the rate by (totalSupply + fee) / totalSupply. Applying it on deposits makes the protocol believe it holds more underlying than it actually does: the recorded redeemable value of all asset tokens exceeds the real underlying balance (paper insolvency). A depositor who redeems their freshly-minted asset tokens computes amountUnderlying = assetTokens * inflatedRate / PRECISION, which exceeds what they deposited, so transferUnderlyingTo tries to send more than the AssetToken holds and reverts - deposits become unredeemable.

Risk

Likelihood: High - happens on every deposit() call; it is the normal path.

Impact: High - corrupts the core exchange-rate accounting, over-states redeemable underlying (insolvency), and makes legitimate redemptions revert, locking depositor funds.

Proof of Concept

A single deposit raises the exchange rate above the 1e18 start (it should not), and the inflated rate makes redeeming the minted asset tokens revert because it tries to withdraw more underlying than was deposited. Runnable Foundry test (extend BaseTest):

import { AssetToken } from "../../src/protocol/AssetToken.sol";
​
function test_PoC_depositInflatesExchangeRate() public {
thunderLoan.setAllowedToken(tokenA, true);
​
address lp = makeAddr("lp");
uint256 amount = 10e18;
tokenA.mint(lp, amount);
​
vm.startPrank(lp);
tokenA.approve(address(thunderLoan), amount);
thunderLoan.deposit(tokenA, amount);
​
AssetToken asset = thunderLoan.getAssetFromToken(tokenA);
// a pure deposit should NOT change the rate, but it did:
assertGt(asset.getExchangeRate(), 1e18);
​
// the inflated rate makes redeeming the minted asset tokens withdraw more
// underlying than exists in the AssetToken -> revert (funds effectively stuck)
uint256 assetBal = asset.balanceOf(lp);
vm.expectRevert();
thunderLoan.redeem(tokenA, assetBal);
vm.stopPrank();
}

Run forge test --mt test_PoC_depositInflatesExchangeRate -vv; it passes.

Recommended Mitigation

Do not update the exchange rate on deposits. The rate should only change when real fees accrue (in flashloan):

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 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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