0x52 - RageTrade senior vault USDC deposits are subject to utilization caps which can lock deposits for long periods of time leading to UXD instability

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0x52

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RageTrade senior vault USDC deposits are subject to utilization caps which can lock deposits for long periods of time leading to UXD instability

Summary

RageTrade senior vault requires that it maintains deposits above and beyond the current amount loaned to the junior vault. Currently this is set at 90%, that is the vault must maintain at least 10% more deposits than loans. Currently the junior vault is in high demand and very little can be withdrawn from the senior vault. A situation like this is far from ideal because in the even that there is a strong depeg of UXD a large portion of the collateral could be locked in the vault unable to be withdrawn.

Vulnerability Detail

DnGmxSeniorVault.sol

function beforeWithdraw(
    uint256 assets,
    uint256,
    address
) internal override {
    /// @dev withdrawal will fail if the utilization goes above maxUtilization value due to a withdrawal
    // totalUsdcBorrowed will reduce when borrower (junior vault) repays
    if (totalUsdcBorrowed() > ((totalAssets() - assets) * maxUtilizationBps) / MAX_BPS)
        revert MaxUtilizationBreached();

    // take out required assets from aave lending pool
    pool.withdraw(address(asset), assets, address(this));
}

DnGmxSeniorVault.sol#beforeWithdraw is called before each withdraw and will revert if the withdraw lowers the utilization of the vault below a certain threshold. This is problematic in the event that large deposits are required to maintain the stability of UXD.

Impact

UXD may become destabilized in the event that the senior vault has high utilization and the collateral is inaccessible

Code Snippet

https://github.com/sherlock-audit/2023-01-uxd/blob/main/contracts/integrations/rage-trade/RageDnDepository.sol#L99-L115

Tool used

Manual Review

Recommendation

I recommend three safeguards against this: 1) Monitor the current utilization of the senior vault and limit deposits if utilization is close to locking positions 2) Maintain a portion of the USDC deposits outside the vault (i.e. 10%) to avoid sudden potential liquidity crunches 3) Create functions to balance the proportions of USDC in and out of the vault to withdraw USDC from the vault in the event that utilization threatens to lock collateral

[WarTech9]

Possible usecase for insurance fund.

[acamill]

This is the main downside of using not fully liquid strategies for the ALM model, upside being higher yield. We can mitigate this issue with buffers but that's always an issue, and adding buffers with either protocol funds or insurance fund is equivalent to using lower yield strategies, as such not an ideal solution either. (and it add complexity)

My personal opinion is to keep the cap on the illiquid strategy to be low enough relative to the total circulating UXD, that way keeping the high yield but reducing the liquidity crunch issue. That's what we are currently doing on Solana, working on smarter rebalancing and better risk management to keep these cap relevant.

[WarTech9]

As Alex pointed out, this is a known limitation to using a semi-liquid strategy. We will be addressing it in the long term but do not intend to fix as part of the audit.

[IAm0x52]

Sponsor has acknowledged this limitation