trachev - Liquidation protocol fee is not considered when calculating interest rates after liquidations

[sherlock-admin2]

trachev

Medium

Liquidation protocol fee is not considered when calculating interest rates after liquidations

Summary

When a liquidation occurs and interest rates of the collateral reserve are updated, the calculation of the new interest rates does not consider that liquidation protocol fees will also be withdrawn. This causes the collateral reserve interest rates to be higher than intended.

Root Cause

In _burnCollateralTokens when updateInterestRates is called, the value for the _liquidityTaken parameter is set to vars.actualCollateralToLiquidate. This is an issue as it does not include the value of the liquidation protocol fee, transferred to the treasury.
Those fees also need to be a part of _liquidityTaken as IReserveInterestRateStrategy(_reserve.interestRateStrategyAddress).calculateInterestRates will calculate the new interest rate based on the pool's balance of the asset. As the fee transfer is performed after the rates are updated, the asset balance of the pool will be incorrectly inflated by the value of the fees, causing calculateInterestRates to return a higher value and interest rates to be higher than intended.

Internal pre-conditions

1. liquidationProtocolFeePercentage must be more than 0.

External pre-conditions

No response

Attack Path

1. A liquidation occurs with actualCollateralToLiquidate equal to 10 ETH and liquidationProtocolFeeAmount equal to 1 ETH.
2. In order to calculate what the collateral reserve interest rates should be, updateInterestRates is called in _burnCollateralTokens. There the pool's balance of the asset is inflated by 1 ETH of liquidation fees which are going to be transferred from the pool to the treasury after _burnCollateralTokens has been fully executed.
3. Interest rates are wrongly calculated and are more than intended as _liquidityTaken does not include the 1 ETH of liquidation fees.

Impact

As a result, when a liquidation occurs interest rates will be higher than what the protocol intends.

PoC

No response

Mitigation

In _burnCollateralTokens when updateInterestRates is called, the value for the _liquidityTaken parameter should be set to vars.actualCollateralToLiquidate + the number of liquidation fees.

Duplicate of #401