Submitted by unsafesol, also found by peakbolt, 0xnev, rvierdiiev, and 0xRobocop
Absence of proper USDO burn after liquidation in the BigBang market results in a redundant amount of USDO being minted without any collateral or backing. Thus, the overcollaterization of USDO achieved through BigBang will be eventually lost and the value of USDO in supply (1USDO = 1$) will exceed the amount of collateral locked in BigBang. This has multiple repercussions- the USDO peg will be threatened and yieldBox will have USDO which has virtually no value, resulting in all the BigBang strategies failing.
According to the Tapioca documentation, the BigBang market mints USDO when a user deposits sufficient collateral and borrows tokens. When a user repays the borrowed USDO, the market burns the borrowed USDO and unlocks the appropriate amount of collateral. This is essential to the peg of USDO, since USDO tokens need a valid collateral backing.
While liquidating a user as well, the same procedure should be followed- after swapping the users collateral for USDO, the repaid USDO (with liquidation) must be burned so as to sustain the USDO peg. However, this is not being done.
As we can see here: https://github.com/Tapioca-DAO/tapioca-bar-audit/blob/2286f80f928f41c8bc189d0657d74ba83286c668/contracts/markets/bigBang/BigBang.sol#L618-L637, the collateral is swapped for USDO, and fee is extracted and transferred to the appropriate parties, but nothing is done for the remaining USDO which was repaid. At the same time, this was done correctly done in BigBang#_repay for repayment here: https://github.com/Tapioca-DAO/tapioca-bar-audit/blob/2286f80f928f41c8bc189d0657d74ba83286c668/contracts/markets/bigBang/BigBang.sol#L734-L736.
This has the following effects:
Burn the USDO acquired through liquidation after extracting fees for appropriate parties.
0xRektora (Tapioca) confirmed
