We are the flash boys: we have made the first flash loan ever on Blockchain 🔥
This post is about Flash Loan and we will introduce ArbitrageDAO | Flash Boys in details in another post.
In the world of trading, arbitrage is a strategy of taking advantage of price differences between markets to make a profit. Arbitrage opportunities exist in one form or another in all financial markets — crypto being no exception via its many different exchanges. Arbitrage helps reduce the price disparity of an asset in different markets even as it helps boost the liquidity.
We focus on decentralized exchanges running on the Ethereum blockchain that have Contract Fillable Liquidity (CFL). Examples of exchanges with CFL are Oasis, 0x relayers (open-orderbook only), Uniswap, Bancor, and Kyber. Exchanges with CFL allow traders to exploit arbitrage opportunities within one transaction to the Ethereum blockchain.
What are flash loans?
Flash loans are designed for developers to borrow in a flash without needing to put up any collateral. All of this is done in a single transaction (one block)! Devs can borrow from the Aave reserve pools on the condition that the liquidity is returned to the pool before the transaction ends. If this liquidity fails to return to the pool in time, the transaction is reversed, ensuring the safety of the reserve pool.
Flash loans have many interesting use-cases including:
- Arbitrage between decentralized exchanges
- Liquidation of loans on several lending platforms like Compound, dYdX or Nuo
- Refinance, e.g. take DAI from Aave, close your MakerDAO CDP, get the collateral, deposit on Compound, open a position, get the DAI back, return the DAI plus a fee
This allows many more actors to come play in the arbitrage and liquidation space because no capital is needed to get started. Arbitrage opportunities usually do not require much capital (in the $100 — $10k range). Liquidations, on the other hand, require a lot of capital to liquidate borrower positions. Many liquidations…