[0IP-28] 0VIX Security Upgrade

Proposal:

This proposal seeks approval for code enhancements to the 0VIX Protocol smart contracts, bolstering its defenses against identified economic vulnerabilities, including those related to oracle exploits.

Motivation:

In the pursuit of a promising future for decentralized finance, the ongoing enhancement of protocol security and robustness is essential. The path forward is paved by recognizing potential threats and learning from past vulnerabilities, both those we've preempted and those we've unfortunately experienced firsthand.

In an ecosystem where the economic safety of protocols isn't always externally audited, our strength lies in embracing every experience. Rather than succumbing to setbacks, we must foster community trust by demonstrating that, despite these setbacks, this journey is shaping better knowledge and industry standards.

While the 0VIX Protocol stands as a testament to robust design, it has not been immune to economic vulnerabilities. Some of these vulnerabilities manifested before remedial actions could take place. With an unwavering commitment to progress, we introduce this proposal, aiming to prevent past vulnerabilities from resurfacing.

By advocating for these code enhancements, our goal is clear: to bolster the 0VIX Protocol's defenses against evolving threats, ensuring its continued resilience and unwavering service to its users in a secure manner.

Details:

0IP-26 mentioned several security measures deemed necessary for a safe reopening of 0VIX PoS but which would also enhance the safety of 0VIX zkEVM. Some of these measures require the code of 0VIX Protocol to be amended, two of which are ready to be deployed imminently:

1. Prevention Mechanism Against Toxic Liquidations (“Prevention Mechanism”);

2. On-Chain Circuit Breaker Integration (“Circuit Breaker”);

3. The Prevention Mechanism corresponds to an amendment of the liquidation incentive and of the closing factor, both becoming dynamic rather than static.

Inspired by the findings expounded in the Toxic Liquidation Spirals research paper, these two adjustments would dynamically scale the liquidation incentives such that toxic liquidation spirals cannot take place anymore.Only liquidations which render user positions healthier will be possible, but any safety measure it involves specific trade offs, as expounded in the research paper.

On the one hand, the static 10% liquidation incentive would be replaced by a dynamic incentive which scales inversely proportional to the liquidated user’s loan-to-value ratio (LTV):

Liquidation incentive = min( 10% , 100 * (1 -LTV) / LTV )

On the other hand, the static closing factor of 75% would be replaced by one that grows linearly with the liquidated user’s LTV, such that at the insolvency threshold (LTV>1), a user’s entire loan position can be closed in one operation.

The code of the Prevention Mechanism was audited by yAudit/yAcademy (the link to the audit will be available soon) and is ready to be deployed both on PoS and zkEVM. If approved by this vote, it will be immediately deployed on zkEVM and subsequently, on PoS as soon as the latter is reopened.

2. The Circuit Breaker is a kill switch mechanism that allows pausing everything (minting/borrowing/repaying/withdrawals/liquidations/transfers) in one single transaction across all markets.

In the aftermath of the April 28th exploit we witnessed how critical it is to halt the lending market effectively.

The code of the Circuit Breaker was audited by yAudit/yAcademy and is ready to be deployed both on PoS and zkEVM. If approved by this vote, it will be immediately deployed on zkEVM and subsequently, on PoS as soon as the latter is reopened.

Quorum Standards:

• 100,000 preVIX

Voting period:

• 3 days

Vote options:

• Option 1: Accept the proposal
• Option 2: Further discussion needed