How to become a Crypto Whale using Flash Loans?

By Akshit Gupta

GDSC, VIT Bhopal

Published in

GDSCVITBhopal

3 min readJul 12, 2022

So you want to get wealthy?! Let us dive right in!!

(Not financial advice 👀)

Before understanding flash loans, we will start with some basic questions :

1. Why do people borrow money?

2. What is the difference between good debt and bad debt?

3. How to leverage debt?

Why do people borrow money?

People borrow money to pay for their expenses and invest in businesses, real estate, or other assets. In traditional finance, people take Home Loans, Car Loans, Business loans for investments, etc.

What is the difference between good debt and bad debt?

When you borrow money to buy assets, not liabilities, it can be considered good debt and vice-versa.

Assets put money in your pocket, and liabilities take money out of your pocket. Even the house you live in is a liability — Robert Kiyosaki.

How to leverage debt?

The simple way to leverage debt is by keeping the borrow interest rate less than the APY (Annual Percentage Yield) on that fund.

In simple words, you should make more money using the borrowed amount than you owe.

What the heck is a Flash Loan?

According to Aave (a De-Fi borrowing and lending protocol), a real-world analogy for Flash Loans does not exist.

Imagine if there was a mechanism by which you could borrow any amount of money without depositing any collateral and use that money in any way you want, and then return it with little to no interest. If you can not return it, you never got the money in the first place. Flash loans make all of this possible!!

It sounds very absurd when you first hear it, but it is possible with the help of smart contracts.

How does it work?

Flash loans are made possible by smart contracts. A flash loan consists of a single transaction. The user borrows a certain amount of money at the beginning of the transaction. One can use that money in any way an individual wants by communicating with other smart contracts. The transaction ends with returning the borrowed money with little to no fees.

Why would someone want a flash loan?

A flash loan allows a retail user to perform monetary moves as effectively as a whale. Some profit-making strategies include :

Arbitraging

Discrepancies across decentralized exchanges create opportunities for traders to buy low and sell high. With excess funding, traders can make very vast gains using flash loans.

Collateral Swapping

If someone has borrowed a collateralized loan, they can use flash loans to swap out the collateral to avoid getting liquidated by the protocol.

Flash Minting

Lots of tokens exist only during the transaction and get burnt at the end of the transaction. Flash minting can satisfy a minimum balance condition for minting or white-listing an NFT.