Fees charged from entire theoretical pledge amount instead of actual pledge amount

[code423n4]

Lines of code

https://github.com/code-423n4/2022-10-paladin/blob/d6d0c0e57ad80f15e9691086c9c7270d4ccfe0e6/contracts/WardenPledge.sol#L328

Vulnerability details

Description

Paladin receives a 5% cut from Boost purchases, as documented on the website

"Warden takes a 5% fee on Boost purchases, and 5% on Quest incentives. However, there are various pricing tiers for Quest creators. Contact the Paladin team for more info."

Here's how fee calculation looks at createPledge function:

vars.totalRewardAmount = (rewardPerVote * vars.votesDifference * vars.duration) / UNIT;
vars.feeAmount = (vars.totalRewardAmount * protocalFeeRatio) / MAX_PCT ;
if(vars.totalRewardAmount > maxTotalRewardAmount) revert Errors.IncorrectMaxTotalRewardAmount();
if(vars.feeAmount > maxFeeAmount) revert Errors.IncorrectMaxFeeAmount();
// Pull all the rewards in this contract
IERC20(rewardToken).safeTransferFrom(creator, address(this), vars.totalRewardAmount);
// And transfer the fees from the Pledge creator to the Chest contract
IERC20(rewardToken).safeTransferFrom(creator, chestAddress, vars.feeAmount);

The issue is that the fee is taken up front, assuming totalRewardAmount will actually be rewarded by the pledge. In practice, the rewards actually utilized can be anywhere from zero to totalRewardAmount. Indeed, reward will only be totalRewardAmount if, in the entire period from pledge creation to pledge expiry, the desired targetVotes will be fulfilled, which is extremly unlikely.

As a result, if pledge expires with no pledgers, protocol will still take 5%. This behavior is both unfair and against the docs, as it's not "Paladin receives a 5% cut from Boost purchases".

Impact

Paladin fee collection assumes pledges will be matched immediately and fully, which is not realistic. Therefore far too much fees are collected at user's expense.

Proof of Concept

1. Bob creates a pledge, with target = 200, current balance = 100, rewardVotes = 10, remaining time = 1 week.
2. Protocol collects (200 - 100) 10 WEEK_SECONDS * 5% fees
3. A week passed, rewards were not attractive enough to bring pledgers.
4. After expiry, Bob calls retrievePledgeRewards() and gets 100 10 WEEK_SECONDS back, but 5% of the fees still went to chestAddress.

Tools Used

Manual audit

Recommended Mitigation Steps

Fee collection should be done after the pledge completes, in one of the close functions or in a newly created pull function for owner to collect fees. Otherwise, it is a completely unfair system.

[Kogaroshi]

The issue is acknowledge, and we do calculate fee on the basis of all rewards, and not only the one that are gonna be used to reward users. The fee ratio is gonna be of 1% to start with (might change before deploy based on market estimations), and the Core team will be able to change the ratio quickly to adapt it to market and Pledge creators needs (with also considering the Paladin DAO revenues). The Paladin team will also considers Pledge creators that are in specific cases and overpay fees (because they already have delegated boost that will last through the whole Pledge and more), and will be able to refund a part of those fees to the creator if the DAO agrees And if this system does not fit in the current market, and is a blocker to potential Pledge creators, we will be able to modify the way fees are handled, and deploy a new iteration of Pledge pretty fast to answer the issue.

[c4-judge]

kirk-baird marked the issue as satisfactory

[c4-judge]

kirk-baird marked the issue as selected for report

[c4-judge]

kirk-baird marked the issue as primary issue