Jolly Cobalt Ant: Fix Slippage In _redeem Function

Hey guys! Let's dive into a critical vulnerability found in the Jolly Cobalt Ant protocol, specifically within the _redeem function. This issue, categorized as medium severity, revolves around the missing slippage protection, which could seriously impact users when they're redeeming their mTokens.

Description

The core of the problem lies in the _redeem function, which you can find here. This function is designed to allow users to exchange their mTokens back for the underlying asset. However, and this is a big however, it's missing a crucial safeguard: slippage protection.

Think of it this way: when you're swapping tokens, the exchange rate can fluctuate between the time you submit your transaction and the time it actually gets executed. This fluctuation is what we call slippage, and it can mean you end up receiving less of the asset than you initially expected. To counter this, many protocols include a minAmountOut parameter, allowing users to specify the minimum amount of tokens they're willing to receive. If the actual amount falls below this threshold, the transaction gets reverted, protecting the user from unfavorable rates. Now, let's contrast the _redeem function with the _mint function, which you can check out here. The _mint function does include this minAmountOut parameter, providing users with that crucial slippage protection. It looks like this:

function _mint(address user, address receiver, uint256 mintAmount, uint256 minAmountOut, bool doTransfer)

See that minAmountOut? That's the key! It's there to safeguard users during minting. But when we look at the _redeem function:

function _redeem(address user, uint256 redeemTokens, bool doTransfer)

...we see that it's missing! There's no minAmountOut parameter in sight. This omission leaves users vulnerable to slippage when redeeming their mTokens, which is a serious oversight.

This lack of slippage protection in the _redeem function is a significant concern because it leaves users exposed to potential losses, especially during periods of market volatility. The impact can be quite substantial, as users may end up receiving significantly less of the underlying asset than they anticipated when initiating the redemption. Imagine you're redeeming a large amount of mTokens, expecting a certain return, but due to a sudden price fluctuation, you receive a fraction of that amount. That's the kind of scenario this vulnerability can lead to, and it's not a pleasant one.

The absence of a minAmountOut parameter means that users have no control over the minimum amount of underlying tokens they'll receive. This is particularly problematic in decentralized finance (DeFi) environments, where market conditions can change rapidly. For instance, if there's a surge in redemption requests or a sudden drop in the value of the underlying asset, the exchange rate can shift dramatically between the time a user submits their transaction and when it's actually processed on the blockchain. Without slippage protection, users are essentially at the mercy of these market fluctuations. They have no way to ensure they'll get a fair exchange rate, and they could end up losing a significant portion of their funds. This vulnerability not only affects individual users but also undermines the overall trust and reliability of the protocol. If users perceive the redemption process as risky or unpredictable, they may be hesitant to participate in the platform, which could hinder its growth and adoption. Therefore, addressing this issue is crucial for maintaining the integrity and usability of the Jolly Cobalt Ant protocol. Adding slippage protection to the _redeem function would align it with industry best practices and provide users with the security and control they need to confidently interact with the system.

Impact

The impact of this missing slippage protection is that users may receive significantly less of the underlying asset than they expected when redeeming mTokens. This is especially true during periods of high volatility or if someone is actively trying to manipulate the exchange rate. Imagine a scenario where you're redeeming a large amount of mTokens, expecting a certain amount of the underlying asset in return. However, due to a sudden price fluctuation or a malicious actor manipulating the market, the exchange rate shifts dramatically. Without slippage protection, your transaction will still go through, but you'll receive a much smaller amount of the underlying asset than you anticipated. This can lead to significant financial losses for users, eroding trust in the protocol and potentially driving users away. The vulnerability also opens the door for arbitrage opportunities that can further exacerbate the problem. If the exchange rate on the Jolly Cobalt Ant protocol deviates significantly from the market rate, arbitrageurs can exploit this difference by redeeming mTokens on the protocol and selling the underlying asset elsewhere, or vice versa. These arbitrage activities can put additional pressure on the exchange rate, leading to even greater slippage and potentially harming other users who are trying to redeem their mTokens. Therefore, the impact of this vulnerability is not just limited to individual users but can also affect the overall stability and efficiency of the protocol.

In addition to financial losses and market manipulation, the lack of slippage protection can also have a psychological impact on users. If users experience unexpected losses due to slippage, they may become discouraged from using the protocol and may even lose faith in the decentralized finance (DeFi) ecosystem as a whole. Trust is crucial in DeFi, and vulnerabilities like this can undermine the confidence that users have in these systems. This is particularly important in the context of mTokens, which are often used as collateral for loans or other financial instruments. If users cannot reliably redeem their mTokens for the underlying asset, it can create uncertainty and instability in the broader DeFi ecosystem. For instance, if a user has borrowed against their mTokens and needs to redeem them to repay the loan, the lack of slippage protection could prevent them from doing so, potentially leading to liquidation and further financial losses. Furthermore, the vulnerability can create a negative perception of the Jolly Cobalt Ant protocol among potential users and investors. If the protocol is known to be susceptible to slippage issues, it may be seen as less secure and reliable compared to other lending platforms that have implemented proper slippage protection mechanisms. This can hinder the protocol's growth and adoption, as users may prefer to use platforms that offer greater security and predictability. Therefore, addressing this vulnerability is essential for ensuring the long-term success and sustainability of the Jolly Cobalt Ant protocol.

POC (Proof of Concept)

Here's the snippet of code that highlights the issue:

function _redeem(address user, uint256 redeemTokens, bool doTransfer)
        internal
        nonReentrant
        returns (uint256 underlyingAmount)
    {
        _accrueInterest();
        // emits redeem-specific logs on errors, so we don't need to
        underlyingAmount = __redeem(payable(user), redeemTokens, 0, doTransfer);
    }

Notice how the _redeem function calculates the underlyingAmount without considering any minimum output amount. The __redeem function is called with 0 as the slippage parameter, effectively disabling slippage protection.

Recommendation

The recommendation is straightforward: we need to add a minAmountOut parameter to the _redeem function. This is exactly what's done in the _mint function, and we should follow the same pattern here. By adding this parameter, users can specify the minimum amount of underlying tokens they're willing to receive when redeeming their mTokens. This will protect them from unexpected slippage and ensure they get a fair exchange rate. The implementation would involve modifying the function signature of _redeem to include the minAmountOut parameter, like this:

function _redeem(address user, uint256 redeemTokens, uint256 minAmountOut, bool doTransfer) internal nonReentrant returns (uint256 underlyingAmount)

Then, within the function, a check should be added to ensure that the actual amount of underlying tokens received is greater than or equal to the minAmountOut parameter. If the actual amount is less than the specified minimum, the transaction should be reverted to protect the user from unfavorable slippage. This check could be implemented using a simple require statement, like this:

require(underlyingAmount >= minAmountOut, "Slippage protection: amount received is less than minAmountOut");

This check would ensure that the user receives at least the minimum amount they specified, or the transaction will fail, preventing them from incurring unexpected losses due to slippage. In addition to adding the minAmountOut parameter and the corresponding check, it's also important to update any external contracts or functions that call the _redeem function to include this new parameter. This may involve modifying the interfaces and function calls in other parts of the codebase to ensure compatibility with the updated _redeem function. Furthermore, it's crucial to thoroughly test the modified _redeem function to ensure that the slippage protection mechanism works as expected and doesn't introduce any new vulnerabilities or unexpected behavior. This testing should include a variety of scenarios, such as high volatility periods, large redemption amounts, and potential manipulation attempts, to ensure the robustness of the solution.

By implementing these changes, the Jolly Cobalt Ant protocol can significantly enhance the security and reliability of its redemption process, providing users with greater confidence and control over their transactions. This will not only protect users from financial losses but also contribute to the overall trust and adoption of the protocol within the decentralized finance ecosystem. Remember, security is paramount, and adding slippage protection to the _redeem function is a crucial step towards making the Jolly Cobalt Ant protocol more resilient and user-friendly.