Lack of Security Check Before Initiating Liquidation

Summary

The smart contract D3Funding, responsible for managing pool borrow/repay and maker deposit/withdraw functionalities, exhibits a critical vulnerability due to the absence of a crucial security check before initiating the liquidation process. This oversight poses a significant risk of executing the liquidation under conditions that may not be safe, thereby compromising the overall security of the contract.

Vulnerability Detail

The vulnerability is rooted in the inadequate implementation of security checks within the D3Funding contract, specifically in the phase preceding the initiation of the liquidation process. This deficiency opens up the possibility of liquidation occurring without proper verification of safety conditions.

The identified vulnerability arises from the failure to conduct a comprehensive safety check before triggering the liquidation process. The absence of this essential verification step allows the liquidation to proceed without ensuring that the prevailing conditions within the contract are indeed safe and secure.

Impact

The identified vulnerability in the D3Funding smart contract, characterized by the absence of a robust security check before initiating the liquidation process, carries severe implications upon exploitation. The potential impact encompasses a range of adverse consequences that extend beyond mere financial losses for users. Here's a more detailed analysis:

Financial Losses for Users:

Exploiting this vulnerability may lead to unsafe liquidation conditions, jeopardizing the assets held within the smart contract. Users participating in the liquidity provision or borrowing activities could face unexpected and substantial financial losses.

Market Disruptions:

The compromised security of the liquidation process introduces the risk of market disruptions. Sudden and unsafe liquidation events have the potential to trigger cascading effects across the broader market, impacting token prices and overall market stability.

Undermining User Confidence:

Instances of unexpected losses and market turbulence resulting from insecure liquidation conditions can significantly undermine user confidence in the D3Funding contract. This, in turn, may lead to a loss of trust in the platform and deter future participation.

Compromise of Contract Integrity:

The vulnerability poses a direct threat to the overall security posture of the smart contract. In the worst-case scenario, exploitation could compromise the integrity of the contract, potentially allowing malicious actors to manipulate or disrupt its normal functioning.

Reputation Damage:

The occurrence of adverse events, especially those affecting users' financial well-being, has the potential to tarnish the reputation of the D3Funding platform. Reputation damage could have lasting consequences, impacting user adoption and stakeholder trust.

Increased Operational Risks:

The compromised security in the liquidation process introduces heightened operational risks for the D3Funding contract. These risks include potential legal ramifications, regulatory scrutiny, and increased operational overhead to rectify issues post-exploitation. Wider Ecosystem Impact:

Beyond the immediate confines of the D3Funding contract, the vulnerability may have a broader impact on the decentralized finance (DeFi) ecosystem. Uncontrolled liquidation events could trigger a chain reaction affecting other protocols and interconnected systems.

Code Snippet

https://github.com/sherlock-audit/2023-12-dodo/blob/main/dodo-v3/contracts/DODOV3MM/D3Pool/D3Funding.sol#L26-L45

Tool used

Manual Review

Recommendation

To address the critical vulnerability and mitigate the associated risks, it is imperative to implement a robust security check within the D3Funding contract before initiating the liquidation process. The following code modification is recommended:

// Additional function to perform a comprehensive security check
function isLiquidationSafe() internal view returns (bool) {
    return checkSafe() && checkCanBeLiquidated();
}

// Modified liquidation initiation with enhanced security check
function startLiquidation() external onlyVault {
    require(isLiquidationSafe(), Errors.NOT_SAFE);
    isInLiquidation = true;
}

This modification introduces a new internal function isLiquidationSafe() that combines the existing safety checks (checkSafe() and checkCanBeLiquidated()). The startLiquidation() function is then updated to utilize this enhanced security check before allowing the initiation of the liquidation process.

This modification ensures a more comprehensive evaluation of safety conditions, reducing the likelihood of unsafe liquidation scenarios and fortifying the overall security of the smart contract.

Duplicate of #37

sherlock-audit / 2023-12-dodo-judging

Irissme - Lack of Security Check Before Initiating Liquidation #42