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Glamorous Plum Baboon

High

Centralization Risks in LiquidationLogic Contract

Description

The LiquidationLogic contract is designed to handle liquidation mechanics based on asset prices fetched from an external price oracle (IPriceOracleGetter). This contract depends heavily on the oracle for determining liquidation thresholds, without any fallback mechanisms or decentralized solutions in place.

Impact

The reliance on an external oracle, without any fallback or redundancy mechanisms, introduces a centralization risk. Specifically, if the oracle becomes compromised or provides faulty price data, malicious actors could manipulate the liquidation thresholds. This could lead to unjust liquidations or allow attackers to exploit the system by causing mispriced assets or incorrect liquidation actions.

In a worst-case scenario, this vulnerability could be exploited to manipulate the market, resulting in financial losses for users and undermining the contract's integrity. Furthermore, reliance on a single centralized oracle increases the risk of a single point of failure, which could result in the entire liquidation process being unreliable or vulnerable to external attacks.

https://github.com/sherlock-audit/2025-01-aave-v3-3/blob/main/aave-v3-origin/src/contracts/protocol/libraries/logic/LiquidationLogic.sol#L264-L350

PoC (Proof of Concept)

The vulnerability arises from the assumption that the oracle’s price data is always reliable. A compromised oracle, whether through malicious manipulation or a bug, could provide manipulated price data. An attacker who can influence the oracle could adjust liquidation thresholds to their advantage, potentially triggering liquidation events inappropriately or preventing legitimate liquidations.

For example:

  • If an oracle is compromised to report inflated asset prices, it could delay or avoid the liquidation of an over-leveraged position.
  • If the oracle reports incorrect or manipulated low prices, users could be liquidated unfairly, losing their collateral.

Mitigation

To mitigate the risks of centralization and ensure the reliability of the liquidation process, the following actions are recommended:

  1. Implement Fallback Mechanism:

    • Introduce a secondary, trusted price oracle or fallback mechanism to ensure the contract can continue to function properly even if the primary oracle fails or is compromised. This could involve a set of multiple oracles, and the contract can choose the most reliable data source.

  2. Use Decentralized Oracle Solutions:

    • Transition from a centralized price oracle to a decentralized solution, such as Chainlink or Band Protocol, that aggregates price data from multiple sources. This reduces the risk of manipulation since the data comes from multiple independent sources rather than relying on a single entity.

  3. Oracle Failover Logic:

    • Implement logic that allows for automatic fallback to alternative oracles when the primary oracle is unavailable or compromised. This failover should be transparent and ensure the system remains functional with valid data.