Protocol Upgrade Compatibility Review: Sky Lending

Target Protocol: Sky Lending (TVL: $5509.2M)

Protocol Upgrade Compatibility Review – Sky Lending

TVL: ≈ $5.51 B (Ethereum + L2s)

Prepared by: [Your Firm] – Senior DeFi Security Research & Auditing Team

Date: 2 September 2026

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1. Executive Summary

Sky Lending is a high‑value, permission‑less money‑market protocol that aggregates liquidity across Ethereum L1 and multiple roll‑ups (Arbitrum, Optimism, zkSync). The platform is currently undergoing a major upgrade (v2.3 → v3.0) that introduces a new interest‑rate model, cross‑chain collateral adapters, and a modular “upgrade‑gate” that allows future on‑chain parameter changes without a hard‑fork.

Our Upgrade Compatibility Review focuses on the interaction surface between the new upgrade‑gate, the existing core contracts, and the cross‑chain bridge adapters. The goal is to verify that the upgrade does not introduce regressions, break existing invariants, or open new attack vectors that could jeopardise the $5.5 B TVL.

Key Findings

Category	Severity	Summary
Critical	9 / 10	Upgrade‑gate re‑entrancy – the new UpgradeController can be called from a malicious CollateralAdapter during the same transaction, allowing an attacker to execute two upgrades atomically and bypass the timelock checks.
High	8 / 10	Cross‑chain replay / state‑injection – the new BridgeMessageVerifier does not fully validate the source chain ID for L2 → L1 messages, enabling a replay attack that can double‑mint synthetic assets.
High	7 / 10	Interest‑rate oracle manipulation – the new DynamicRateOracle aggregates data from three external feeds but lacks a quorum check; a single compromised feed can skew rates enough to trigger liquidations.
Medium	5 / 10	Upgrade‑gate timelock bypass via delegatecall – the timelock contract is called through delegatecall from a user‑controlled library, allowing an attacker to replace the timelock logic after the upgrade is scheduled.
Low	3 / 10	Gas‑price dependent fallback – the fallback function in LendingPool reverts on gas‑price spikes, potentially causing denial‑of‑service for borrowers during network congestion.

Overall, the upgrade introduces four critical/high‑severity issues that could lead to fund loss, unauthorized minting, or systemic instability if left unaddressed.

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2. Identified Attack Vectors

2.1 Upgrade‑Gate Re‑entrancy (Critical – 9/10)

• Contracts involved: UpgradeController, UpgradeExecutor, CollateralAdapterV2
• Flow: UpgradeController.upgradeTo(address newImpl) calls UpgradeExecutor.execute(address target, bytes calldata data). UpgradeExecutor performs a delegatecall to the target implementation. A malicious CollateralAdapter can implement a fallback that calls back into UpgradeController.upgradeTo before the first call finishes, allowing two upgrades in a single transaction.
• Impact: Bypasses the 48‑hour timelock, enabling an attacker to replace the core LendingPool with a malicious implementation that drains assets.

2.2 Cross‑Chain Replay / State‑Injection (High – 8/10)

• Contracts involved: BridgeMessageVerifier, SyntheticAssetMinter, L2MessageRelayer
• Flow: L2 → L1 messages contain (msgId, amount, assetId). The verifier only checks the signature and a Merkle proof but omits the source chain identifier. An attacker can replay a previously confirmed L2 message on a different L2 (or the same L2 after a fork) to mint additional synthetic assets.
• Impact: Unlimited inflation of synthetic assets, dilution of collateral, and potential liquidation cascades.

2.3 Oracle Manipulation via Insufficient Quorum (High – 7/10)

• Contracts involved: DynamicRateOracle, RateAggregator, external feeds (Chainlink, Band, DIA)
• Flow: The oracle aggregates three feeds and selects the median. No quorum is enforced; if one feed returns an outlier (e.g., due to a compromised node), the median can be shifted dramatically.
• Impact: Artificially high borrowing rates can force borrowers into liquidation; artificially low rates can be exploited to over‑borrow against under‑collateralized positions.

2.4 Timelock Bypass via Delegatecall (Medium – 5/10)

• Contracts involved: UpgradeTimelock, UpgradeController, LibraryProxy
• Flow: UpgradeController calls UpgradeTimelock.execute(address target, bytes calldata data) using delegatecall to a library that can be upgraded independently. An attacker who gains control of the library (via a separate upgrade path) can replace the timelock logic after a proposal is queued, effectively removing the delay.
• Impact: Reduces the security window for community review, enabling rapid malicious upgrades.

2.5 Gas‑Price Dependent Fallback (Low – 3/10)

• Contracts involved: LendingPool.fallback()
• Flow: The fallback reverts when tx.gasprice > MAX_GAS_PRICE (set to 200 gwei). During periods of network congestion, legitimate transactions (e.g., repayments) may be forced to revert, causing temporary denial‑of‑service.
• Impact: Not directly exploitable for fund loss, but can erode user confidence and trigger cascading liquidations if borrowers cannot repay on time.

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3. Prioritized Technical Recommendations

#	Recommendation	Severity	Description & Implementation Steps
1	Introduce non‑re‑entrancy guard on UpgradeController	Critical (9)	• Add bool upgrading; state flag with require(!upgrading, "Re‑entrancy") at entry of upgradeTo. • Use OpenZeppelin’s ReentrancyGuard on UpgradeExecutor.execute. • Ensure the flag is cleared via finally‑style pattern (_ in Solidity 0.8+).
2	Add explicit source‑chain validation in BridgeMessageVerifier	High (8)	• Extend the message struct to include uint256 sourceChainId. • Store a mapping of authorized L2 chain IDs. • Verify msg.sourceChainId == authorizedChainId before processing.
3	Enforce quorum & sanity checks in DynamicRateOracle	High (7)	• Require at least two out of three feeds to be within a configurable deviation (e.g., 5 %). • Introduce a fallback to a “trusted” on‑chain rate if quorum fails. • Emit RateQuorumFailed events for off‑chain monitoring.
4	Replace delegatecall to timelock with direct external call	Medium (5)	• Refactor UpgradeController to call UpgradeTimelock.execute(address,bytes) via a standard external call. • If library functionality is required, keep it read‑only (view/pure) and separate from upgrade logic.
5	Remove gas‑price ceiling or make it configurable via governance	Low (3)	• Delete the hard‑coded MAX_GAS_PRICE check. • If a ceiling is still desired, expose it as a governance‑controlled parameter with a 48‑hour timelock.
6	Comprehensive integration test suite for cross‑chain flows	High (overall)	• Simulate L2 → L1 → L2 message cycles with malicious replay attempts. • Use Foundry/Hardhat with forked L1/L2 environments.
7	Formal verification of UpgradeController state machine	Critical (overall)	• Model the upgrade lifecycle (Propose → Queue → Execute) in a tool such as Certora or Slither‑Prover. • Verify invariants: “Only one upgrade per proposal ID”, “Timelock delay respected”.
8	Deploy a “canary” upgrade on a testnet (e.g., Sepolia + Arbitrum Sepolia)	Medium (overall)	• Run the full upgrade flow with real‑world traffic. • Monitor for re‑entrancy, bridge replay, and oracle anomalies before mainnet launch.

Prioritisation rationale: Recommendations 1‑3 address attack vectors that could directly result in loss of funds or protocol insolvency and therefore must be implemented before the mainnet upgrade. Recommendations 4‑5 mitigate secondary risks and improve operational robustness. Recommendations 6‑8 are process‑level safeguards that ensure the technical fixes are correctly integrated and verified.

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4. Risk Score

Dimension	Score (1‑10)	Rationale
Technical Vulnerability	8	Multiple critical/high‑severity bugs in the upgrade path and cross‑chain components.
Economic Impact	9	Potential for unlimited synthetic asset minting and core contract takeover → > $5 B at risk.
Likelihood (post‑upgrade)	6	Exploits require sophisticated knowledge of the upgrade flow but are feasible for well‑resourced adversaries.
Mitigation Readiness	4	Some fixes are straightforward (re‑entrancy guard) while others need architectural changes (bridge verification).
Overall Composite Risk	7.5 → 8 (rounded)	Risk Score: 8 / 10 – High. Immediate remediation is required before mainnet deployment.

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5. Conclusion

Sky Lending’s ambition to become a cross‑chain, modular money‑market platform is commendable, and the proposed v3.0 upgrade brings valuable new functionality. However, the upgrade‑gate and cross‑chain bridge components introduce critical systemic risks that could jeopardise the entire TVL if exploited.

Our assessment recommends immediate implementation of the re‑entrancy guard, source‑chain validation, and oracle quorum mechanisms, followed by a rigorous integration test campaign and formal verification of the upgrade state machine. Only after these mitigations are deployed, audited, and validated on testnets should the mainnet upgrade be scheduled.

By addressing the identified attack vectors and adopting the prioritized recommendations, Sky Lending can preserve its security posture, maintain community trust, and safely unlock the next phase of growth.

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Prepared for Sky Lending by:

[Your Name] – Senior DeFi Security Researcher

[Your Firm] – Smart‑Contract Auditing & Formal Verification

Contact: security@[yourfirm].com | +1‑555‑123‑4567

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