Lines of code
<https://github.com/code-423n4/2023-07-moonwell/blob/main/src/core/MToken.sol#L1002&gt;
<https://github.com/code-423n4/2023-07-moonwell/blob/main/src/core/MultiRewardDistributor/MultiRewardDistributor.sol#L1235-L1239&gt;

Vulnerability details

Impact

If a borrower is undercollateralized then he can be liquidated by a liquidator by calling the MErc20.liquidateBorrow function. liquidateBorrow function calls the MToken.liquidateBorrowFresh in its execution process. Inside the liquidateBorrowFresh function the MToken.repayBorrowFresh is called which verifies whether repayment of borrowed amount is allowed by calling the Comptroller.repayBorrowAllowed function. The repayBorrowAllowed function updates the borrower eligible rewards by calling the MultiRewardDistributor.updateMarketBorrowIndexAndDisburseBorrowerRewards.

The MultiRewardDistributor.updateMarketBorrowIndexAndDisburseBorrowerRewards function calls the disburseBorrowerRewardsInternal to ditribute the multi rewards to the borrower.
The disburseBorrowerRewardsInternal calls the sendReward function if the _sendTokens flag is set to true.

sendReward function is called for each emissionConfig.config.emissionToken token of the MarketEmissionConfig[] array of the given _mToken market.

sendReward function transafers the rewards to the borrower using the safeTransfer function as shown below:

        token.safeTransfer(_user, _amount);

Problem here is that emissionToken can be ERC777 token (which is backward compatible with ERC20) thus allowing a malicious borrower (the recipient contract of rewards in this case) to implement tokensReceived hook in its contract and revert the transaction inside the hook. This will revert the entire liquidation transaction. Hence the undercollateralized borrower can avoid the liquidation thus putting both depositors and protocol in danger.

Proof of Concept

    function liquidateBorrow(address borrower, uint repayAmount, MTokenInterface mTokenCollateral) override external returns (uint) {
        (uint err,) = liquidateBorrowInternal(borrower, repayAmount, mTokenCollateral);
        return err;
    }

<https://github.com/code-423n4/2023-07-moonwell/blob/main/src/core/MErc20.sol#L139-L142&gt;

        (uint repayBorrowError, uint actualRepayAmount) = repayBorrowFresh(liquidator, borrower, repayAmount);

<https://github.com/code-423n4/2023-07-moonwell/blob/main/src/core/MToken.sol#L1002&gt;

        if (_amount > 0 && _amount <= currentTokenHoldings) {
            // Ensure we use SafeERC20 to revert even if the reward token isn't ERC20 compliant
            token.safeTransfer(_user, _amount);
            return 0;
        } else {

<https://github.com/code-423n4/2023-07-moonwell/blob/main/src/core/MultiRewardDistributor/MultiRewardDistributor.sol#L1235-L1239&gt;

Tools Used

Manual Review and VSCode

Recommended Mitigation Steps

Hence it is recommended to disallow any ERC777 tokens being configured as emissionToken in any MToken market and only allow ERC20 tokens as emissionTokens.

Assessed type

Other

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