Understanding the Risks: Logical Errors in Rebase Tokens
Rebase tokens have become an increasingly popular type of cryptocurrency over the past few years. Unlike traditional cryptocurrencies like Bitcoin and Ethereum that have a fixed supply, rebase tokens use an elastic supply that expands and contracts based on price movement. This unique elastic supply allows the token's circulating supply to rebase, meaning it automatically adjusts based on a predetermined formula.
The most well-known rebase token is Ampleforth, which expands supply when price falls and contracts supply when price rises. The goal is to maintain a stable unit price. Other prominent rebase tokens include Elastic, Base Protocol, and Yield Protocol.
While innovative, rebase tokens come with their own unique risks that need to be thoroughly analyzed and understood. Smart contracts power rebase tokens, executing the logic that controls the token's expanding and contracting supply. To properly evaluate the risks of a rebase token, deep analysis of the project's smart contract code is required.
This article will provide a comprehensive, technical analysis of the risks associated with the smart contracts powering rebase tokens. It will examine code vulnerabilities, logic errors, and potential exploits that could put funds at risk. The analysis aims to shed light on the intricate complexities of rebase token smart contracts so investors can make informed decisions.
Smart Contract Risks
Smart contracts are self-executing programs stored on a blockchain that run as programmed without any possibility of downtime, censorship, or third-party interference. They allow the creation of decentralized applications (dApps) and digital assets like rebase tokens.
However, smart contract code is complex, and even simple mistakes can lead to disastrous consequences. Some of the main smart contract risks include:
Coding Errors
Like any software code, smart contract code can contain errors, bugs, and vulnerabilities that can lead to unintended behavior. These coding errors occur frequently in smart contracts since code cannot be updated once deployed on a blockchain. Even extensive testing cannot catch all errors.
Logical Errors
Beyond coding syntax errors, smart contract developers can make logical errors in the design of the contract. The contract may function as programmed but contains flawed logic that causes the contract to act incorrectly in certain situations. Catching logical flaws requires deep analysis by experienced auditors.
Call Stack Depth Vulnerabilities
Smart contracts execute through a call stack, which is the chain of function calls made during execution. Calls to untrusted contracts can exploit the call stack by making repeated calls to drain gas fees, cause delays in execution, or even freeze execution entirely.
Reentrancy Vulnerabilities
Reentrancy occurs when external contract calls allow an attacker to make additional calls back into the original contract before the first execution resolves. This "reenters" the original contract and can steal funds or cause other unintended behaviors.
Gas Optimization Vulnerabilities
Complex smart contracts require gas fees to execute transactions and compute logic. Attackers can attempt to drive up gas costs or create denial of service attacks by forcing the contract to consume large amounts of gas during execution.
Short Address Attack
Early smart contracts were vulnerable to attacks where extra zeroes were added to the address making a call to the contract. This allowed the attacker to impersonate a different address and withdraw funds from the contract that they do not own.
Unchecked Call Return Values
Calling external contracts returns a boolean value indicating if the call succeeded or failed. Failing to check return values can cause critical contract logic failures during calls to external addresses.
Transaction Ordering Dependence
Within a blockchain transaction, execution order of multiple smart contract calls is determined by miners. Attackers can exploit this by manipulating order to their advantage in certain situations, like making withdrawal calls before deposit calls.
Timestamp Dependence
Smart contracts may utilize the timestamp of the current block to trigger certain logic. This can be exploited by miners tampering with the timestamp to alter contract behavior for their benefit.
Integer Overflows and Underflows
If unsigned integer variables are not properly checked, they can underflow below 0 or overflow above 2^256-1. This can lead to perverse contract logic errors and incorrect token minting.
Delegatecall Vulnerabilities
The delegatecall function runs code from another contract while preserving the storage context of the calling contract. This can be leveraged to manipulate storage variables and extract funds from the caller's contract.
Arithmetic Accuracy
Performing arithmetic operations on integer data types without proper bounds checking can produce unexpected wrapping or overflow errors leading to unintended logic outcomes. Financial assumptions may also be broken.
Smart Contract Standards
Well-structured, standardized smart contract development is essential for managing risk. Some of the main standards include:
ERCs - Ethereum Request for Comments
ERCs are technical standards for the Ethereum ecosystem. Critical ERC standards for smart contracts include:
. ERC-20 - Fungible Token Standard
. ERC-223 - Token Standard that handles accidental transfers to contracts
. ERC-721 - Non-Fungible Token Standard
. ERC-1155 - Multi-Token Standard
OpenZeppelin Contracts
OpenZeppelin provides extensively tested smart contract libraries in Solidity and other languages. These community vetted contracts greatly simplify development and reduce risk.
NatSpec
NatSpec is a standard for embedded natural language explanations of smart contract code functionality. This allows easier human interpretation of contract logic.
Security Tools
Usage of smart contract security tools including MythX, Slither, and Oyente can detect vulnerabilities during development using static code analysis, symbolic execution, and formal verification.
Best Practices
Adhering to language-specific best practices from references like the Solidity Docs increases code quality and security. Common pitfalls like reentrancy must be avoided.
Analyzing Smart Contract Risk for Rebase Tokens
Now that we've covered background information on smart contract risks and development standards, we can perform an in-depth risk analysis specifically focused on rebase token projects.
Supply Manipulation
The expandable and contractible supply of a rebase token is controlled by its smart contract. An attacker may attempt to exploit vulnerabilities in external calls or underlying logic to manipulate supply in their favor.
Return values from calls to external contracts that determine prevailing market conditions must be thoroughly validated. Overdependence on swap ratios from DEX pricing pairs creates manipulation risk. Contract logic could contain errors allowing attackers to mint themselves virtually unlimited token supply under the right conditions.
The rebase scheduling logic itself also needs heavy auditing. The timing and frequency of rebase events strongly impact circulating supply. Too high a frequency depletes supply rapidly, while long delays fail to properly peg the token price.
Oracle Manipulation
Rebase tokens rely on blockchain data feeds called oracles to provide external pricing information. Oracles introduce centralized points of failure - if the oracle is compromised, attackers can manipulate the data fed to the rebase contracts.
Sybil attacks are possible where the oracle signers are overwhelmed with fraudulent identities. Availability is also a concern if the oracle platforms suffer downtime or block withholding attacks. Verifying the decentralization and security of the oracle framework is critical.
Liquidity Draining
The smart contracts governing a rebase token's liquidity pools on AMMs like Uniswap are vulnerable to attacks that drain reserves.
Attackers can exploit rebase minting logic and low liquidity right after a rebase event to remove disproportionate amounts of one asset from the pool. Continuous manipulation further skews the ratio till essentially all funds are drained into the attacker's control.
Hoarding Vulnerabilities
Rebase tokens encourage holders to hoard tokens long term to gain higher proportional allocations after supply contractions. However, this hoarding creates risk.
If a large percentage of tokens are persistently held in cold storage, liquidity suffers and markets become highly inefficient. At extremes, one holder could control the entire circulating supply. The contract should ensure rebase minting is distributed pro rata among all holders to discourage hoarding.
Short Squeezes
Rebase mechanics coupled with hoarding may open the door for short squeezes on token exchanges. A sharp spike in buying activity creates significant upwards price movement.
Meanwhile, contracted supply reduces ability to deliver on short positions. The rapid increase in borrow costs can trigger cascading liquidations and massive losses, while holders reap large gains. Trading restrictions may be required during periods of highest volatility.
Counterparty Risks
There are risks associated with external parties that interact with rebase token contracts.
Exchange listing introduces counterparty risk. Buggy integration with the listing exchange's systems can lead to incorrect pricing and liquidity issues. If the exchange is hacked, any rebase token reserves may be lost.
Third-party rebase calculators are commonly used by holders to track elastic supply changes. These sites could deploy malicious code that steals wallet secrets or miscalculates rebase yields. Only calculators whose code has been audited should be trusted.
Finally, developer admin keys possessed by the rebase token team provide centralized control to upgrade contracts or drain funds. There have been instances of developers absconding with funds abruptly. Trust requires a fully decentralized contract without special access.
Flash Loan Attacks
Flash loans allow instantly borrowing crypto funds without any collateral. Attacks are possible using these loans and arbitrage to manipulate oracle prices or drain liquidity from rebase token pools in a single Ethereum transaction.
For example, borrowing a huge quantity of the rebase token on Aave or dYdX exchange to dump on the market can briefly crash prices. This skews the oracle price input to the rebase contracts in the attacker's favor before repaying the flash loan.
Auditing Rebase Token Smart Contracts
Now that we've explored the main risk factors, performing professional audits of rebase token smart contracts prior to launch is essential for eliminating vulnerabilities. Here is an overview of the auditing process:
Code Review
The first step is a manual review of the smart contract code line-by-line in conjunction with NatSpec documentation. Coding best practices, security standards, gas optimization, and clarity of rebase logic are evaluated.
Static Analysis
Next, static analysis tools like MythX are used to inspect code without execution. This technique quickly finds high severity issues like reentrancy and integer bugs. Abstract interpretation and formal verification methods have significant coverage.
Dynamic Analysis
Dynamic analysis executes the code through techniques like symbolic execution to uncover errors that evade static analysis. Unit test suites are also developed to validate expected behavior across the range of possible inputs.
Computer Modeling
Advanced techniques like computational proofs and model checking explore all possible program states looking for any deviations from specification. This provides mathematical certainty of correctness.
Penetration Testing
Attempted attacks on the contract are done in a test environment to uncover any logical flaws or unanticipated execution paths during high stress scenarios, like heavy rebasing activity, oracle manipulation, and flash loan arbitrage attacks.
Code Coverage
This measures the percentage of code exercised by the input testing. 100% coverage ensures tests fully execute all functions and branches down to every line of code.
Gas Consumption
Gas usage is profiled during execution to verify it remains below the blocks' gas limits under heavy operational loads. High gas algorithms get further optimized.
Formal Verification
The formal correctness proof demonstrating mathematical certainty that the code matches the rebase logic specification is reviewed. This provides the highest level assurance that the implementation will behave as designed.
Audit Report
Finally, all the issues uncovered during the audit are documented in a detailed report. The audit team discusses the findings with the developers, who can then fix any bugs prior to launch.
Following the audit, the smart contracts can be deployed with greatly increased security and minimal risk. However, ongoing monitoring is required to identify emerging threats, like new attack vectors. Zero-day vulnerabilities that evaded the audit may still exist.
Case Study: Base Protocol Audit
As a case study illustrating the rebase token audit process, we will examine an audit report performed on the Base Protocol smart contracts by industry leading firm Trail of Bits in September 2020. Base Protocol is an elastic supply protocol that helps stabilize the purchasing power of stablecoins.
The auditors analyzed the Base Protocol smart contracts written in Solidity for security vulnerabilities and correctness. Trail of Bits utilized manual review, static and dynamic analysis, fuzzing, automated verification, and symbolic execution to cover all possible execution paths.
Several issues were identified, including:
. Overpowered owner abilities that allow potential misuse
. Incorrect token burning logic that fails to reduce total supply
. Vulnerability to flash loan arbitrage attacks
. Inadequate validation of the Chainlink oracle implementation
. Missing events for critical state changes
The Base Protocol team fixed all the findings prior to mainnet launch. The rebase logic was formally verified to ensure it matches the specification. Ongoing audits continue to analyze new code releases.
This real-world example demonstrates the importance of professional audits for identifying bugs that could completely undermine the rebase token model. No critical vulnerabilities have been exploited since launch.
Gas Optimization for Rebase Tokens
Given the frequency of rebase events, optimizing gas consumption is particularly important for rebase tokens to ensure smooth execution under the blockchain's gas limits.
Here are some optimization techniques:
. Set block interval for rebase close to the average block time to distribute gas usage evenly
. Use efficient solidity data structures like mappings instead of arrays
. Apply lazy evaluation logic to defer state changes unless necessary
. Initialize static variables like oracle addresses outside of the constructor
. Cache cumbersome calculations and store results
. Limit query functions that read blockchain state
. Optimize rebasing algorithmic logic for efficiency
. Employ gas tokens or scheduler contracts to smooth gas usage peaks
Testing rebasing under high network loads will reveal any remaining gas optimization opportunities. The system should run flawlessly even at peak activity.
Rebase tokens introduce new dimensions to cryptocurrency through their elastic supply and novel tokenomics. However, the complexities of their supporting smart contracts require deep analysis to avoid risks, as we have discussed in this article.
By applying formal verification, thorough testing, gas optimization, and professional audits, these risks can be mitigated to an acceptably low threshold. The insights provided in this analysis aim to promote secure development and educated investment in these tokens.
When executed properly, rebase tokens can form a vibrant new ecosystem and further cement the role of cryptocurrencies as the future of finance. However, hasty development will undermine their enormous potential. Progress must be made with the utmost care.
Rebase tokens remind us that we are still early in blockchain's evolution - much innovation still lies ahead.
