CS Note 8.8: Manipulating Bold Supply With Flashloans

[bingen]

When opening a trove, a user pays an upfront fee equal to the average interest for 7 days. The interest rate can be as low as 0.5%, thus the upfront fee can be as low as 0.5%/52 = 0.0096%. The interest rate calculation also takes the interest of the newly opened Trove into account. Hence, a large trove can have a significant impact on the average interest rate and by extension the upfront fee of opening the trove.

A user could be incentivized to inflate the BOLD supply using a flashloan, since the redemption fee depends on the percentage of the BOLD supply being redeemed.

This can be particularly profitable when large amounts of BOLD are getting redeemed. For example, when a user attempts to redeem 50'000 BOLD of a total supply of 1 million BOLD, they would pay a fee of 5% of the redeemed amount. If the supply is doubled to 2 million BOLD, the fee would be halved to 2.5%.

Assuming that the average interest rate is 1% after the big trove is opened, this behavior is profitable:

0.05 * 50000 < 0.025 * 50000 + 1e9 * 0.01/52

Note that the flashloan can be taken out from the smallest branch to have a larger impact on the average interest rate in that branch, which will make the upfront fee cheaper. If the user wants to avoid self-redemption, they can add the minted BOLD to the stability pool to reduce the percentage of redemptions that are routed through that branch.