evm-audit-notes

Pattern: Bad-Debt Socialization via Earnings Accumulator

Pattern notes from reading Exactly Protocol’s Market.sol (clearBadDebt, ~line 605). Part of the working notes.

The Pattern

When a borrower’s collateral is exhausted by liquidation, the remaining debt doesn’t vanish and isn’t written off against a treasury. It is socialized into the floating pool’s earnings accumulator: future floating-pool earnings absorb the loss, diluting all floating depositors’ yield rather than any single party’s principal.

Core flow (Exactly’s implementation):

1. Gated entry — only the Auditor can call clearBadDebt (the Auditor itself is invoked at the end of every liquidation via handleBadDebt, which decides when an account is underwater enough to clear).
2. Fixed-rate legs first — the borrower’s fixed borrow positions are iterated via a packed 32-bit maturity bitmap. For each maturity, if earningsAccumulator >= badDebt, the position is fully cleared.
3. Backup-debt yield routing — when a fixed pool’s repay returns a backup-debt reduction, the corresponding share of that pool’s unassignedEarnings is moved into the earnings accumulator (proportional, mulDivDown).
4. Floating leg last — remaining floating debt is cleared through previewRepay + noTransferRefund.
5. Settlement — earningsAccumulator -= totalBadDebt, one SpreadBadDebt event.

What to Check When You See This Pattern

• Partial-clear skip semantics. If the accumulator can’t cover a maturity’s bad debt, that position is skipped, not reverted. Clearing may require multiple calls as earnings accrue. Ask: can bad debt sit uncleared indefinitely if the accumulator stays thin? Does any accounting assume it’s gone (e.g., market utilization, oracle-fed risk metrics)?
• Rounding direction on yield routing. The mulDivDown on unassigned-earnings transfer rounds against the accumulator being credited (conservative). Invert the direction anywhere in the loop and each clearBadDebt call leaks dust the other way.
• Bitmap iteration bounds. The maturity walk advances maturity += INTERVAL per shift and stops when the packed word is zero. Positions packed beyond the intended window, or a corrupted bitmap, change loop cost and touched storage — the input-validation question is “who can ever write this bitmap, and do they validate packing?”
• Trust concentration. The Auditor is the sole entry point for debt clearance across every Market. An Auditor-level flaw (e.g., clearing debt for a borrower who isn’t actually underwater) mints solvency out of the accumulator in every market at once. When auditing one Market, always pull the Auditor’s validation into scope.
• Reward hooks inside the loop. handleRewards(true, borrower) fires per cleared maturity — rewards accounting on an account mid-liquidation is a classic cross-function reentrancy surface if the hook target is attacker-influenced.
• Event fidelity. Each cleared maturity emits RepayAtMaturity with assets = badDebt — downstream subgraphs that treat this as a real repay (liquidity returning) will mis-model the pool. Check off-chain consumers before dismissing it as cosmetic.

Generalization

Socialize-the-earnings is one of three common bad-debt endgames:

Endgame	Loss lands on	Fragile when
Earnings accumulator (Exactly)	floating depositors’ future yield	earnings < bad debt for long periods
Mint-backstop / insurance pool	backstop LPs	backstop drains; incentive to drain
Inflate share price (protocol debt token)	all shareholders at once	death-spiral correlation with the loss event

The audit question is always who is the residual claimant, and whether that party has consented (via disclosed docs) to holding that tail risk.