How To Profit From Flash Loan Arbitrage
Imagine you could borrow a million dollars instantly and with no collateral. The whole thing would happen anonymously, and you wouldn’t need to assume liability for the loan.
Sounds crazy? That, in a nutshell, is how flash loans work. In the financial demimonde of DeFi they’re perfectly normal and growing in popularity – not least for their facility in making profitable arbitrage trades.
You’ll need a big enough position to make it worthwhile but the barriers to entry are low. No need for institutional backing or SEC registration. With a bit of effort and the right tools, anyone can take part.
At a glance
- Flash loans are trustless DeFi transactions that allow users to borrow funds without collateral.
- Traders can use them to identify arbitrage opportunities across decentralized exchanges (DEXs).
- To access a flash loan provider liquidity pool provider like Aave (AAVE), you’ll need to set up a smart contract compatible its protocol.
- There are some barriers. Technical complexity can be off-putting, and opportunities arise from tiny price differentials. You’ll need knowledge, tools, and the capability to act fast.
What are flash loans?
Flash loans enable DeFi users to borrow cryptocurrencies from an on-chain liquidity pool. There’s no application to complete and no need to provide a security. The principal just needs to be returned to the pool within the same blockchain transaction (plus a fee).
If the borrower fails to do that, the transaction is completely reverted. Risk of default is zero. Users gain greater access to assets without undermining the solvency of the on-chain liquidity pool.
Practices unthinkable in traditional finance are a daily reality in DeFi, and for retail traders, that creates opportunities. First launched on the Aave DeFi protocol in 2020, platforms including dYdX, Equalizer Finance, Uniswap, SushiSwap, and DeFiSaver have all moved to offer flash loan capability.
How does flash loan arbitrage work?
Blockchain transactions typically resolve in a few seconds, so the use cases for flash loans must be equally quick. Arbitrage trades are one of the most popular.
Flash loan arbitrage leverages price discrepancies for the same crypto asset across different decentralized exchanges.
For example: say the price of …
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