hash - Planned large liquidation fees will make liquidation not profitable causing bad debt

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Planned large liquidation fees will make liquidation not profitable causing bad debt

Summary

Planned large liquidation fees will make liquidation not profitable causing bad debt

Vulnerability Detail

The planned values for the liquidation fee and liquidation discount are (0-30%,10%)

Liquidation Fee = 0 (Might be increased to 20-30% in the future)
Liquidation Discount = 10% = 100000000000000000

The liqudation fee is taken directly from the captured assets and not the profits of the liquidator. link

    function _transferAssetsToLiquidator(address position, AssetData[] calldata assetData) internal {

            uint256 fee = liquidationFee.mulDiv(assetData[i].amt, 1e18);
            // transfer fee amt to protocol
            Position(payable(position)).transfer(owner(), assetData[i].asset, fee);
            // transfer difference to the liquidator
            Position(payable(position)).transfer(msg.sender, assetData[i].asset, assetData[i].amt - fee);

Since the liquidation discount is capped to 10%, maxCapturableAmount will be:

maxCapturableAmount = liquidatingAmount 100/(100-10) == 1.111 liquidationAmount

setting liquidation fee to anything greater than ((1.111 - 1)/1.111) * 100% == 9.99% will result in the liquidation being a loss for the liquidator

Impact

Liquidations won't happen causing bad debt and loss for the depositors

Code Snippet

https://github.com/sherlock-audit/2024-08-sentiment-v2/blob/main/README.md https://github.com/sherlock-audit/2024-08-sentiment-v2/blob/0b472f4bffdb2c7432a5d21f1636139cc01561a5/protocol-v2/src/PositionManager.sol#L466-L480

Tool used

Manual Review

Recommendation

Limit the liquidation fees

Duplicate of #91