Incorrect MOMP calculation in neutral price calculation
Summary
When calculating MOMP to find the neutral price of a borrower, borrower's accrued debt is divided by the total number of loans in the pool, but it's total pool's debt that should be divided. The mistake will result in lower neutral prices and more lost bonds to kickers.
Vulnerability Detail
As per the whitepaper:
MOMP: is the price at which the amount of deposit above it is equal to the average loan size of
the pool. MOMP is short for “Most Optimistic Matching Price”, as it’s the price at which a loan of
average size would match with the most favorable lenders on the book.
I.e. MOMP is calculated on the total number of loans of a pool (so that the average loan size could be found).
Here, only borrower's debt (borrowerAccruedDebt_) is divided, not the entire debt of the pool.
Impact
The miscalculation affects only borrower's neutral price calculation. Since MOMP is calculated on a smaller debt (borrower's debt will almost always be smaller than total pool's debt), the value of MOMP will be smaller than expected, and the neutral price will also be smaller (from the whitepaper: "The NP of a loan is the interest-adjusted MOMP..."). This will cause kickers to lose their bonds more often than expected, as per the whitepaper:
If the liquidation auction yields a value that is over the “Neutral Price,” NP, the
kicker forfeits a portion or all of their bond.
Jeiwan
medium
Incorrect MOMP calculation in neutral price calculation
Summary
When calculating MOMP to find the neutral price of a borrower, borrower's accrued debt is divided by the total number of loans in the pool, but it's total pool's debt that should be divided. The mistake will result in lower neutral prices and more lost bonds to kickers.
Vulnerability Detail
As per the whitepaper:
I.e. MOMP is calculated on the total number of loans of a pool (so that the average loan size could be found).
MOMP calculation is implemented correctly when kicking a debt, however it's implementation in the Loans.update function is not correct:
Here, only borrower's debt (
borrowerAccruedDebt_) is divided, not the entire debt of the pool.Impact
The miscalculation affects only borrower's neutral price calculation. Since MOMP is calculated on a smaller debt (borrower's debt will almost always be smaller than total pool's debt), the value of MOMP will be smaller than expected, and the neutral price will also be smaller (from the whitepaper: "The NP of a loan is the interest-adjusted MOMP..."). This will cause kickers to lose their bonds more often than expected, as per the whitepaper: