LP token price manipulation by first depositor

[code423n4]

Lines of code

https://github.com/code-423n4/2022-12-caviar/blob/main/src/Pair.sol#L417-L428
https://github.com/code-423n4/2022-12-caviar/blob/main/src/Pair.sol#L63-L99

Vulnerability details

Impact

LP token price manipulation by first depositor. He can make price of 1 share to be very big and benefit on rounding when next depositor add liquidity.

Proof of Concept

When user add liquidity to the pool then addQuote function is called to calculate amount of LP tokens that will be minted for user.
https://github.com/code-423n4/2022-12-caviar/blob/main/src/Pair.sol#L417-L428

    function addQuote(uint256 baseTokenAmount, uint256 fractionalTokenAmount) public view returns (uint256) {
        uint256 lpTokenSupply = lpToken.totalSupply();
        if (lpTokenSupply > 0) {
            // calculate amount of lp tokens as a fraction of existing reserves
            uint256 baseTokenShare = (baseTokenAmount * lpTokenSupply) / baseTokenReserves();
            uint256 fractionalTokenShare = (fractionalTokenAmount * lpTokenSupply) / fractionalTokenReserves();
            return Math.min(baseTokenShare, fractionalTokenShare);
        } else {
            // if there is no liquidity then init
            return Math.sqrt(baseTokenAmount * fractionalTokenAmount);
        }
    }

In case if there is no liquidity yet then Math.sqrt(baseTokenAmount * fractionalTokenAmount) is used to calculate amount of shares.
Attacker first can wrap token to get fractional tokens. Then attacker deposits 1 base token and 1 fractional token and get minted 1 LP token.
After that he can send huge amount of base tokens to the Pool directly. He even don't need to send fractional tokens, because addQuote will return min amount from baseTokenShare and fractionalTokenShare, so it's enough to increase reserves of only 1 token and it's easier to do with base token.
As result we will have only 1 LP token and huge reserves of base and fractional tokens.

When next depositors will be providing liquidity that means that they should provide big amount of base token to get a share. Also because of rounding in calculations, all amount that is (nextDepositorAmount * lpSharesAmount) % baseTokenReserves will be distributed among depositors and first depositor will benefit from that.

As result next depositors will be loosing part of funds and attacker will be earning more funds.

Tools Used

VsCode

Recommended Mitigation Steps

Do not allow first depositor to mint small amount of LP tokens.

[c4-judge]

berndartmueller marked the issue as duplicate of #442

[c4-judge]

berndartmueller marked the issue as satisfactory