ERC4626 share inflation when removing assets

Support Contracts
1

I noticed a problem with ERC4626 shares when removing assets without adjusting the total number of minted shares (bad debt socialisation).

Imagine a single-token share vault following the ERC4626 standard. The share price is well-defined as long as the assets are monotonically increasing. However, the moment the assets decrease . due to debt socialisation or because an admin harvests part of the assets kept in the vault - complications arise.

New depositors will experience a share “boost”, receiving significantly more shares than earlier depositors. Essentially, these new depositors will steal any future profits accrued by the vault.

Numerical example:

  • A deposits 1000 assets and receives 1000 shares (share price of 1).
  • B deposits 500 assets and receives 500 shares.
  • C deposits 1500 assets and receives 1500 shares.

At this point, the vault has 3000 assets. Suppose the vault then loses 2900 assets and is left with only 100.

  • D deposits 1000 assets and receives 33000 shares.

Now, D effectively owns most of the vault. If the admin reintroduces the 2900 assets, the ownership distribution is as follows:

  • A’s 1000 shares are now worth 121 assets.
  • B’s 500 shares are now worth 61 assets.
  • C’s 1500 shares are equivalent to 182 assets.
  • D’s 33000 shares are equal to 3636 assets.

D now owns most of the vault assets.

This issue persists even if shadow shares are utilised.

2

So how does the vault lose 2900 assets?

3

Imagine the vault is a junior tranche and the admin can withdraw assets to cover the bad debt, in this case 2900 assets

4

If the admin does this, he/she should pause the function to deposit/mint, withdraw assets from the contract is a dangerous action.

5

The vault could be a junior tranche and the smart contract automatically transfers assets to the senior tranche. What I am investigating here is:

  1. is the ERC4626 standard suitable to perform debt socialisation via asset removal (without adjusting share supply)?
  2. are we introducing any security risks by doing that?
6

I see, so under these circumstances, I think it is normal for the example you mentioned above.
At first 1 asset can get 1 share, later loss happens, so 1 share cannot get back 1 asset, that is 1 asset can get more than 1 share. So I think it is ok based on my logic, as for you, I am not sure, I do not know what your expected circumstances. 1 asset still can only get 1 share when loss happens?