Issue M-1: _calculateMaxBorrowCollateral calculates repay incorrectly and can lead to set token liquidation

Source: #26

Found by

0x52, Kirkeelee

Summary

When calculating the amount to repay, _calculateMaxBorrowCollateral incorrectly applies unutilizedLeveragePercentage when calculating netRepayLimit. The result is that if the borrowBalance ever exceeds liquidationThreshold * (1 - unutilizedLeveragPercentage) then all attempts to repay will revert. This is nearly identical to the valid issue reported in the last contest that was fixed in the Aave leverage extension.

Root Cause

In MorphoLeverageStrategyExtension.sol:L1124 the borrow limit is reduced by unutilizedLeveragePercentage which will cause L1134 to underflow and revert.

Internal pre-conditions

unutilizedLeveragePercentage must be a nonzero value. For context this is nonzero for every existing leveraged token currently deployed by Index Coop.

External pre-conditions

The underlying collateral value decreases rapidly in price pushing the set towards liquidation

Attack Path

1. The price of the underlying collateral decreases rapidly causing liquidationThreshold to drop
2. borrowBalance exceeds liquidationThreshold * (1 - unutilizedLeveragPercentage)
3. Calls to MorphoLeverageStrategyExtension#ripcord will revert due to underflow
4. Set token is liquidated

Impact

Set token suffers losses due to liquidation fee. For most Morpho markets this is at least 5%. Due to the leveraged nature of the set the loss will be multiplicative. This means a 3x leverage token will lose 15% NAV (5% * 3), 5x leverage will lose 25% NAV (5% * 5), etc.

PoC

No response

Mitigation

Don't adjust the max value by unutilizedLeveragPercentage when deleveraging

Discussion

sherlock-admin2

The protocol team fixed this issue in the following PRs/commits: IndexCoop/index-coop-smart-contracts#192