When the protocol suffers a default, the BPT stakers are the first line of defense and the protocol trades the BPT pool tokens for the single-sided liquidity asset of the Balancer LIQUIDITY <> MPT pool. (PoolLib.handleDefault)
Note that a pool token to single-asset trade is the same as burning the LP tokens to receive an equal amount of all underlying tokens, and then trading all other tokens received for the single asset.
Its the reverse of this:
This means on each default MPT tokens are sold for the liquidity asset. As the default is potentially a huge amount that happens at once, this creates a huge arbitrage opportunity.
As the default suffered can be a huge amount and the repayment happens at once, this creates a huge arbitrage opportunity: The MPT token price goes down. The borrow could also be incentivised to not repay the loan and take advantage of the arbitrage opportunity, either competing themselves on-chain or through shorts/bets on the MPT price.
Hard to completely mitigate. Pool delegates should be especially careful when giving out high-value loans and demand high collateral lockup.
lucas-manuel (Maple) confirmed:
Nick Johnson (Judge):
