A collateral token may become invalid following a governance decision. In such a case, the agent is expected to switch it to another valid collateral token. However, there is a scenario where the vault owner has no incentive to perform this switch at least temporarily.
During liquidation, if the vault collateral token is invalid, then the collateral pool covers the entire payment. If both the pool and the vault are undercollateralized, the vault’s liability is capped at half of the pool’s responsibility.
This creates an incentive for the agent:
- With a valid collateral token, the vault typically pays 100% (vaultFactor) while the pool pays 30% (poolFactor), totaling ~115% for the agent (as vault covers half of poolFactor).
- With an invalid collateral token, the vault’s effective share may drop to only ~65% of responsibility, which is significantly more favorable for the agent.
As a result, agents may strategically avoid switching to a valid collateral token during liquidation, undermining the system’s design.
Alpha: think about the business logic of the flows, is there a way an actor can act in a certain way that doesn't make sense and profit?
Conclusion
This finding would earn you $33790, only requiring a business understanding of the code.