xiaoming90 - Leverage Calculation

[sherlock-admin]

xiaoming90

medium

Leverage Calculation

Summary

The formula for calculating leverage in the Flatcoin protocol does not follow the industry-standard method for calculating leverage. As a result, it might lead to a different interpretation of "leverage" in the context of the Flatcoin protocol compared to traditional finance. Users might be confused, leading to wrong trading decisions being made and potentially incurring losses.

Vulnerability Detail

Flatcoin protocol uses the following formula to calculate leverage:

$$ \text{Leverage} = \frac{(\text{Margin} + \text{Size}) \times 1e18}{\text{Margin}} $$

In this case, the formula adds the margin to the size and then divides it by the margin, which deviates from the standard way of calculating leverage.

https://github.com/sherlock-audit/2023-12-flatmoney/blob/main/flatcoin-v1/src/LeverageModule.sol#L416

File: LeverageModule.sol
413:     /// @notice Asserts that the position to be opened meets margin and size criteria.
414:     /// @param _margin The margin to be deposited.
415:     /// @param _size The size of the position.
416:     function checkLeverageCriteria(uint256 _margin, uint256 _size) public view {
417:         uint256 leverage = ((_margin + _size) * 1e18) / _margin;
..SNIP..

In traditional finance and most trading platforms, leverage is usually calculated as the ratio of the total position size to the trader's own invested capital (margin), as shown below:

Standard Leverage Calculation:

$$ \text{Leverage} = \frac{\text{Total Position Size}}{\text{Trader's Margin}} $$

For example, if a trader uses \$1,000 of their own money (margin) to control a $10,000 position, the leverage is 10x.

Impact

This might lead to a different interpretation of "leverage" in the context of the Flatcoin protocol compared to traditional finance. Users might be confused, leading to wrong trading decisions being made and potentially incurring losses.

Code Snippet

https://github.com/sherlock-audit/2023-12-flatmoney/blob/main/flatcoin-v1/src/LeverageModule.sol#L416

Tool used

Manual Review

Recommendation

Consider using the leverage calculation commonly used in the industry, as shown below:

$$ \text{Leverage} = \frac{\text{Total Position Size}}{\text{Trader's Margin}} $$

[sherlock-admin]

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

takarez commented:

invalid

[rashtrakoff]

We agree that the leverage definition we are using is a bit different than the traditional one, we have made it clear to people about this in the docs. Furthermore, the UI handles this such that users need not worry about knowing the leverage formula we are using.

Furthermore, there will have to be a significant re-design of storage structs and code in general to adopt a more traditional leverage definition which we don't believe warrants such efforts.

[nevillehuang]

Since this is a design choice, closing this issue.