Audit Unfair Liquidation

Unfair Liquidation Auditor

When to Use

• Auditing liquidation fairness, L2 deployments, pause mechanisms
• User mentions: L2 sequencer, grace period, pause, interest accumulation, LTV gap, auction, slippage protection, collateral priority
• Analyzing liquidation timing, state synchronization, user protections
• Reviewing pause/unpause logic, sequencer checks, health score calculations

Audit Workflow

IMPORTANT: Announce skill usage at the start of analysis

Begin with: "I'm using the audit-unfair-liquidation skill to analyze this contract for unfair liquidation vulnerabilities..."

1. Scan for liquidation fairness issues

   • Search: sequencer, paused, accrue, LTV, auction, healthFactor, slippage, collateralPriority, borrower
   • Focus: sequencer checks, pause states, interest accrual, health calculations, auction mechanics

2. Check against vulnerability patterns

   • Reference reference.md for complete checklist
   • Compare code against example.md

3. Validate exploitability

   • Check access control first - grep for onlyOwner|onlyAdmin|onlyGovernance modifiers
   • Can non-privileged actors exploit unfair liquidation mechanisms?
   • Can users be liquidated during sequencer downtime without grace period?
   • Does interest accumulate while repayments paused?
   • Can liquidators cherry-pick stable collateral?
   • Is there an LTV gap between borrow and liquidation?
   • Verify no compensating protections exist
   • Downgrade severity if admin-only unless direct borrower harm

4. Generate report

   • Use deliverable template below
   • Include timing analysis and PoC
   • Rank by severity

Core Vulnerability Patterns

See reference.md for full checklist. Key patterns:

1. Missing L2 sequencer grace period → users liquidated immediately when sequencer restarts
2. Interest accumulates while paused → users liquidated for interest accrued during downtime
3. Repayment paused, liquidation active → users prevented from avoiding liquidation
4. Late interest/fee updates → isLiquidatable uses stale values
5. Lost positive PNL/yield → profitable positions lose gains during liquidation
6. Unhealthier post-liquidation → liquidator cherry-picks stable collateral
7. Corrupted collateral priority → liquidation order doesn't match risk
8. Borrower replacement misattribution → original borrower repays new owner's debt
9. No LTV gap → users liquidatable immediately after borrowing
10. Interest during auction → borrowers accrue interest while being auctioned
11. No liquidation slippage protection → liquidators can't specify minimum rewards

Code examples: See example.md

Severity Criteria

Critical: Missing sequencer grace period on L2, repayment paused while liquidation active, immediate liquidation after borrow (no LTV gap), MUST be exploitable by non-privileged actors High: Interest accumulation during pause, late fee updates, cherry-picking collateral leaving unhealthier state, MUST be exploitable by non-privileged actors Medium: Lost PNL/yield during liquidation, interest accrual during auctions, no liquidator slippage protection, admin-only liquidation timing configuration issues with cascading borrower impact Low: Suboptimal collateral priority without security impact, admin-only parameter issues without immediate borrower impact

IMPORTANT: Admin-only liquidation timing functions (onlyOwner, onlyAdmin, onlyGovernance) are MEDIUM or LOW severity unless:

• Admin can trigger liquidations during sequencer downtime without grace period
• Pause mechanism controlled by admin creates asymmetry (repayment paused, liquidation active)
• LTV configuration by admin allows immediate liquidation after borrowing

False Positives - Do NOT Flag

• L1-only deployments (no sequencer concerns)
• Protocols with explicit admin-only liquidation during pause
• Systems where pause simultaneously halts interest and liquidation
• Documented grace periods after unpause events
• Single-collateral systems (no cherry-picking possible)
• Admin-only pause functions (onlyOwner, onlyAdmin) where pause halts both repayment and liquidation symmetrically
• Governance-controlled LTV parameters with documented gap between borrow and liquidation thresholds
• Admin functions for grace period configuration with reasonable defaults

Deliverable Format

MANDATORY: Before deliverable, verify each checklist.md item against codebase. Flag violations as findings.

Use template: templates/report-template.md

Each finding includes: severity, pattern #, file/lines, description, vulnerable code, timing/fairness analysis, PoC, remediation.

Key Principles

• Fairness - users must have opportunity to avoid liquidation
• Synchronization - pause states must be consistent (repay ↔ liquidate)
• Grace periods - time for users to respond after downtime
• Health improvement - liquidation must improve borrower health
• Predictability - liquidators need slippage protection

Output Guidelines

DO:

• Reference specific lines and functions
• Provide timing analysis (sequencer downtime windows)
• Show PoCs demonstrating unfair liquidation scenarios
• Analyze pause state interactions
• Calculate LTV gaps and health score changes

DON'T:

• Report intentional pause-based liquidation designs
• Flag missing features with alternative mechanisms
• Use vague terms ("might be unfair")
• Ignore documented grace period configurations