Melodic Mocha Aardvark - Insufficient Collateralization Ratio Check Leading to Potential Undercollateralized Loans

[sherlock-admin2]

Melodic Mocha Aardvark

High

Insufficient Collateralization Ratio Check Leading to Potential Undercollateralized Loans

Summary

_assertCollateralizationRatioAtLeastOneHundredPercent function, only ensures that the collateral amount is not less than the loan amount

function _assertCollateralizationRatioAtLeastOneHundredPercent(
    uint256 collateralAmount,
    uint256 loanAmount
) private pure {
    if (collateralAmount < loanAmount) {
        revert CollateralizationRatioTooLow();
    }
}

it is used in functions including matchProposals, _acceptOffer, and _refinance. though it prevents loans from being created with less collateral than the loan amount, but it allows for exactly 1:1 collateralization.

The issue now is :

• Market volatility: The value of the collateral can fluctuate, potentially becoming worth less than the loan amount shortly after the loan is created.
• In situations of a default, there may be costs associated with liquidating the collateral, which aren't factored into this minimum ratio.
• As interest accrues on the loan, the total debt increases, potentially surpassing the collateral value even if it started at 1:1.

Root Cause

https://github.com/sherlock-audit/2024-09-predict-fun/blob/main/predict-dot-loan/contracts/PredictDotLoan.sol#L1234

Internal pre-conditions

No response

External pre-conditions

No response

Attack Path

No response

Impact

• Lenders may not be adequately protected against defaults, as the collateral may be insufficient to cover the loan amount plus accrued interest.
• If multiple loans become undercollateralized, it could lead to significant losses for the protocol and its users
• In a market downturn, many loans could become undercollateralized simultaneously, leading to a cascade of liquidations that could further depress collateral values.

PoC

No response

Mitigation

• If a loan's collateralization ratio falls below a certain threshold, trigger automatic partial or full liquidation to protect lenders.