Description

There are no checks to confirm non-zero risk exposure of the junior tranche during the distribution of interest.

Impact

Interest is sent to the junior tranche even if there are no assets deposited. The interest is not entirely lost and can be recovered through calls to transferUnderlyingTo(...) made by the admin.

We would like to further note that the distribution of IR payments between junior and senior tranches is fixed and not a risk-weighted exposure of the tranches. This creates a dynamic where the JR tranche may only contain $1 backing a $1MM NFT and still receive a fixed share of the interest. Such an opportunity would attract other investors. In theory, they would support the junior tranche until an equilibrium level is found that reflects the market appetite for IR returns and the credit profile of the protocol.

Recommendations

We would like Voyage to please confirm this is the dynamic they seek. In order for this dynamic to be realized, the following recommendation should be observed.

Add a check to ensure that the junior tranche has non-zero exposure to assets paying interest in distributeInterest(...).

Remediation

Voyage has included checks to ensure that the balance of the jr tranche exceeds an optimal liquidity ratio in calls to buyNow in commit 76f21d00↗.