🛡️ Echo Markets Charms App Security Audit

Target: lib.rs (Charms Protocol App) Echo Markets is a decentralized prediction market (dual-token system) using the Charms Protocol

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1. 🌟 Security Highlights

A. Strict UTXO Bitcoin Accounting

The contract no relies purely on abstract token math, it inspects the physical transaction inputs and outputs (tx.coin_ins, tx.coin_outs) to ensure the Market NFT's Satoshi balance perfectly matches the token supply.

• Exploit Prevented: "Free Minting" and "Vault Draining."

B. Bitcoin Dust Limit Protection

The contract enforces a hardcoded min_bet of 10,000 Satoshis.

• Exploit Prevented: Malicious actors cannot create "dust" markets or force the contract to generate uneconomical UTXOs (e.g., 1-satoshi payouts) that would cost more in miner fees to spend than they are worth.

C. Emergency Resolution (Trustless Refunds)

If the trusted Oracle/Reclaim protocol goes offline or the creator loses their keys, user funds are not locked forever. The contract implements a 7-day (604,800 seconds) Emergency Grace Period.

• Exploit Prevented: Permanent fund lockup. After 7 days past the resolution deadline, anyone can bypass the signature check to resolve the market as Invalid, instantly unlocking 100% of user collateral for refunds.

D. Parameter Sanity Bounds

When a market is created, the parameters are strictly bounded:

• fee_bps <= 5000 (Max 50% fee).
• resolution_deadline > trading_deadline.
• Exploit Prevented: Creators cannot set 100%+ fees causing mathematical underflows, nor can they create chronologically impossible markets.

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2. 🔍 Operation Validation Checks

Every transaction routed through app_contract undergoes strict conditional checks depending on the operation.

Create (Market Initialization)

• Check: Exactly 1 input UTXO is used to fund the market.
• Check: At least 1 output exists (the Market NFT).
• Check: min_bet >= 10000 and fee_bps <= 5000.
• Check: Timestamps are logical (trading_deadline > 0 and resolution_deadline > trading_deadline).
• Check (CRITICAL): The market MUST start with yes_supply == 0, no_supply == 0, and fees == 0 (Prevents pre-minting supply).
• Check: Status begins as Active.

Mint (Opening a Position)

• Check: Market status is Active.
• Check: current_timestamp < trading_deadline (No past-posting).
• Check: collateral_amount >= min_bet.
• Check (CRITICAL): Native BTC locked. new_sats == old_sats + collateral_amount.
• Check: Equal amounts of YES and NO tokens are minted.
• Check: new.yes_supply <= max_supply (Prevents integer overflow).

Burn (Closing a Position Early)

• Check: Market status is Active.
• Check: current_timestamp < trading_deadline.
• Check: Exactly equal amounts of YES and NO tokens are destroyed.
• Check (CRITICAL): Native BTC returned. new_sats == old_sats - set_count.

Resolve (Ending the Market) iteration to Reclaim Protocol

• Check: Market status is Active or TradingClosed.
• Check: current_timestamp >= resolution_deadline.
• Check: Cryptographic proof is verified via Schnorr signature (verify_resolution_signature), OR the 7-day emergency timeout has passed and the outcome is being set to Invalid.
• Check: Status transitions to Resolved.

Redeem (Claiming Winnings/Refunds)

• Check: Market status is Resolved.
• Check: If Outcome::Yes, only YES tokens are burned (no_amount == 0).
• Check: If Outcome::No, only NO tokens are burned (yes_amount == 0).
• Check: If Outcome::Invalid, any combination of YES/NO tokens can be burned (Refunds 0.5 sats per token).
• Check (CRITICAL): Native BTC withdrawn. new_sats == old_sats - payout_sats.

Cancel (Creator Abort)

• Check: Status is NOT Resolved.
• Check: Cryptographic Schnorr signature of the creator matches the message SHA256("CANCEL" || market_id).
• Check: Status transitions to Cancelled and resolution becomes Invalid.

ClaimFees (Creator Payday)

• Check: Market status is Resolved.
• Check: Cryptographic Schnorr signature of the creator is verified.
• Check: old.fees > 0 (Prevents empty claims).
• Check: new.fees == 0 (Prevents double-claiming).
• Check (CRITICAL): Native BTC withdrawn. new_sats == old_sats - old.fees.

Token Transfer (P2P Trading) iteration to Cast DEX

• Check: Handled under the TOKEN app tag.
• Check: Market status MUST be Active or TradingClosed (Tokens become soulbound/untransferable once Resolved).
• Check: Token Conservation enforced (input_total == output_total) to prevent unauthorized P2P minting/burning.

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4. Known Limitations & Trust Assumptions

1. Timestamp Oracles: As noted in the documentation, the contract relies on the outer Scrolls layer sequencer to provide an honest current_timestamp to prevent time-based exploits.
2. Oracle Trust: The Cardano cross-chain logic trusts a single Oracle signature rather than verifying a full Light Client Merkle proof (Iteration to Reclaim Protocol).