X12 - Portocol fee on liquidations is calculated wrongly

[sherlock-admin3]

X12

Medium

Portocol fee on liquidations is calculated wrongly

Summary

Protocol fees on liquidations are calculated incorrectly, which could lead to bad debt if enabled.

Vulnerability Detail

The README indicates that the current liquidation fee is 0% but is expected to increase to 20%-30% in the near future.

Liquidation Fee = 0 (Might be increased to 20-30% in the future)

However, the fee is taken from the entire asset amount rather than the liquidator's profit. For example, if a liquidator repays $90 for a position and receives $100, a 20% fee would leave them with only $80 in value, causing him to occur a loss.

https://github.com/sherlock-audit/2024-08-sentiment-v2/blob/main/protocol-v2/src/PositionManager.sol#L476-L480

    //@audit fee is taken from asset amount, not profit
    uint256 fee = liquidationFee.mulDiv(assetData[i].amt, 1e18);
    Position(payable(position)).transfer(owner(), assetData[i].asset, fee);
    Position(payable(position)).transfer(msg.sender, assetData[i].asset, assetData[i].amt - fee);

This approach means that a liquidation fee above LIQUIDATION_DISCOUNT (10%) could discourage liquidations, leading to bad debt. Even a fee below 10% could reduce liquidators' profits, making them less likely to liquidate if the price moves significantly.

Impact

Liquidators may not be incentivized to liquidate, leading to the system accruing bad debt.

Tool Used

Manual Review

Recommendation

Revise the formula to calculate the fee based on the liquidator's profit rather than the total asset value.

Duplicate of #91