57632 sc high inflated tvl in mytsharesdeposited hides protocol insolvency

Submitted on Oct 27th 2025 at 18:55:15 UTC by @niffylord for Audit Comp | Alchemix V3

• Report ID: #57632

• Report Type: Smart Contract

• Report severity: High

• Target: https://github.com/alchemix-finance/v3-poc/blob/immunefi_audit/src/AlchemistV3.sol

• Impacts:

  • Protocol insolvency

Description

Brief / Intro

Whenever _forceRepay or _doLiquidation sends MYT out of the Alchemist, _mytSharesDeposited is left unchanged. getTotalUnderlyingValue() therefore reports collateral that no longer exists, keeping the transmuter bad-debt ratio artificially low. Attackers (or normal users) can continue redeeming and minting against phantom collateral until the protocol runs out of backing, leading to protocol insolvency.

Vulnerability Details

• _forceRepay (src/AlchemistV3.sol:750-789) and _doLiquidation (src/AlchemistV3.sol:867-889) transfer MYT to the transmuter/liquidator but never decrement _mytSharesDeposited.

• getTotalUnderlyingValue() (src/AlchemistV3.sol:1239-1241) converts _mytSharesDeposited to underlying to produce TVL. After the transfer, this value still includes the shares that were sent out.

• Transmuter.getBadDebtRatio() (src/Transmuter.sol:215-226) divides total synthetics by that TVL. With the denominator inflated, the ratio remains below 1 even when collateral has already left the system, so redemptions are not scaled and fresh debt can still be minted.

• Repeated forced repayments or liquidations drain actual MYT while accounting remains unchanged, eventually leaving outstanding alAssets without backing.

Impact Details

Impact: Protocol insolvency

• TVL is overstated by the amount of MYT removed via _forceRepay and _doLiquidation.

• Users continue to redeem at face value because the bad-debt ratio understates insolvency; transmuter releases MYT that no longer exists.

• The discrepancy can grow to the entire protocol collateral, leaving alAssets unbacked and the protocol insolvent.

References

• src/AlchemistV3.sol lines 750-789, 867-889, 1239-1241

• src/Transmuter.sol lines 215-226

• PoC: src/test/poc/MytSharesDepositedPoC.t.sol

Proof of Concept

1. Ensure dependencies are installed (per project README) and Foundry is available.

2. Run the dedicated test:

   forge test --match-test test_poc_mytSharesDeposited_skew -vv

3. Test flow (implemented in src/test/poc/MytSharesDepositedPoC.t.sol):

   • Create a borrower, deposit MYT, mint the maximum allowable alTokens.

   • Pump the mock strategy’s share price to mimic accrued yield.

   • Trigger liquidation from another user; MYT leaves the Alchemist via _doLiquidation.

   • Compare getTotalUnderlyingValue() (uses _mytSharesDeposited) with the actual MYT balance still held by the Alchemist.

4. Logs show Tracked underlying (post) unchanged while Actual underlying (post) drops to zero. The test asserts the discrepancy, proving _mytSharesDeposited never accounted for the transfer and the protocol now believes it holds collateral that is gone.

PoC Source

// SPDX-License-Identifier: MIT
pragma solidity 0.8.28;

import {AlchemistV3Test} from "../AlchemistV3.t.sol";
import {IMockYieldToken} from "../mocks/MockYieldToken.sol";
import {AlchemistNFTHelper} from "../libraries/AlchemistNFTHelper.sol";
import {SafeERC20} from "../../libraries/SafeERC20.sol";
import {IERC20} from "@openzeppelin/contracts/token/ERC20/IERC20.sol";

contract MytSharesDepositedPoC is AlchemistV3Test {
    using SafeERC20 for IERC20;

    function test_poc_mytSharesDeposited_skew() external {
        address borrower = address(0xbeef);

        vm.startPrank(borrower);
        SafeERC20.safeApprove(address(vault), address(alchemist), depositAmount);
        alchemist.deposit(depositAmount, borrower, 0);
        uint256 tokenId = AlchemistNFTHelper.getFirstTokenId(borrower, address(alchemistNFT));
        uint256 maxBorrow = alchemist.getMaxBorrowable(tokenId);
        alchemist.mint(tokenId, maxBorrow, borrower);
        vm.stopPrank();

        uint256 initialSupply = IERC20(address(mockStrategyYieldToken)).totalSupply();
        IMockYieldToken(mockStrategyYieldToken).updateMockTokenSupply(initialSupply * 25);

        uint256 preUnderlyingTracked = alchemist.getTotalUnderlyingValue();
        uint256 preActualUnderlying =
            alchemist.convertYieldTokensToUnderlying(IERC20(address(vault)).balanceOf(address(alchemist)));

        vm.startPrank(externalUser);
        (uint256 totalSeized,,) = alchemist.liquidate(tokenId);
        vm.stopPrank();
        assertGt(totalSeized, 0, "liquidation should seize collateral");

        uint256 postUnderlyingTracked = alchemist.getTotalUnderlyingValue();
        uint256 postActualUnderlying =
            alchemist.convertYieldTokensToUnderlying(IERC20(address(vault)).balanceOf(address(alchemist)));

        emit log_named_uint("Tracked underlying (pre)", preUnderlyingTracked);
        emit log_named_uint("Tracked underlying (post)", postUnderlyingTracked);
        emit log_named_uint("Actual underlying (post)", postActualUnderlying);

        assertGt(postUnderlyingTracked, postActualUnderlying, "TVL should be overstated after liquidation");
        assertEq(postUnderlyingTracked, preUnderlyingTracked, "Tracked TVL unexpectedly changed");
        assertLt(postActualUnderlying, preActualUnderlying, "Actual holdings should fall after liquidation");
    }
}