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sherlock-audit / 2023-12-flatmoney-judging

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xiaoming90 - No incentive to liquidate positions where `settledMargin < 0` #191

Closed sherlock-admin closed 5 months ago

sherlock-admin commented 5 months ago

xiaoming90

high

No incentive to liquidate positions where settledMargin < 0

Summary

There is no incentive to liquidation position where the settledMargin is less than 0, which affects the solvency of the protocol.

Vulnerability Detail

Prompt liquidation of positions is important to the solvency of protocol. Liquidators are incentivized to promptly liquidate such "underwater" positions by receiving a liquidation fee for doing so.

However, if the position's settledMargin is less than zero, no liquidation fee/incentive will be given to the liquidator. As such, any liquidator that performs the liquidation against these accounts will have to bear the cost of execution.

https://github.com/sherlock-audit/2023-12-flatmoney/blob/main/flatcoin-v1/src/LiquidationModule.sol#L142

File: LiquidationModule.sol
108:         // If the settled margin is greater than 0, send a portion (or all) of the margin to the liquidator and LPs.
109:         if (settledMargin > 0) {
..SNIP..
138:         } else {
139:             // If the settled margin is -ve then the LPs have to bear the cost.
140:             // Adjust the stable collateral total to account for user's profit/loss and the negative margin.
141:             // Note: We are adding `settledMargin` and `profitLoss` instead of subtracting because of their sign (which will be -ve).
142:             vault.updateStableCollateralTotal(settledMargin - positionSummary.profitLoss);
143:         }

Impact

Prompt liquidation of positions is important to the solvency of protocol. These underwater accounts (settledMargin < 0) do not provide any liquidation fee as an incentive. Thus, liquidators will not be incentivized to perform liquidation against these accounts and will avoid liquidating these accounts as they will have to bear the gas cost of executing the transaction. As a result, underwater positions and bad debt accumulate in the protocol, threatening the solvency of the protocol.

Code Snippet

https://github.com/sherlock-audit/2023-12-flatmoney/blob/main/flatcoin-v1/src/LiquidationModule.sol#L142

Tool used

Manual Review

Recommendation

Consider incentivizing the liquidators/keepers to liquidate underwater accounts where it's settledMargin < 0 so that these positions can be liquidated promptly.

sherlock-admin commented 5 months ago

2 comment(s) were left on this issue during the judging contest.

ubl4nk commented:

invalid or LowImpact -> i asked it previously from the Sponsor and they will have their own liquidators to liquidate these kind of positions.

takarez commented:

invalid: the if statement ensure that its more than 0

nevillehuang commented 5 months ago

Sponsors comments, this also seems to be noted as a design decision based on comments

At the end of the day, someone has to pay for the liquidation of bad debts. If we provide a portion of margin assoicated with a position to the liquidators then there will be a larger impact on the UNIT price or to the LPs.