HodlTree presents the second-generation of flash loans enabling a better environment for both arbitrageurs and liquidity providers.
What are Flash loans?
Flash loans are a kind of uncollateralized lending that was first introduced in 2020 and has become popular ever since. Mainly, flash loans let you borrow assets without any collateral, however it also requires you to return the liquidity within one block transaction. Such loans work by means of a smart contract that requests a flash loan. It is this contract that performs all specified actions and returns the loan along with all fees in a single transaction. Though claimed to be tricky and only accessible to developers, the innovative technology, which can only be possible within the blockchain world, have quickly become quite popular among traders and, of course, arbitrageurs. As of today, the originator company of flash loans, Aave, reports $4.19B in borrowed amounts, where the leading coin for loans is DAI ($1.72B), followed by USDC ($1.3B) and ETH ($1.05B).
What makes HodlTree Flash Loans the second generation
We have refined the logic of Flash Loans so that it is now possible to pay them back in a different token than the one used in the loan.
This condition creates a win-win situation for all participants, as it expands the range of possibilities for arbitrage and gives liquidity providers the opportunity to earn a higher percentage of their capital compared to the current protocols.
The first module for Flash Loans 2.0 focused on working with Stablecoins has been launched on Mainnet and currently supports USDC, DAI, sUSD, GUSD and TUSD. In the near future, the team also plans to expand Flash Loans 2.0 range for other tokens pegged to the same benchmarks, for example WBTC/renBTC.
How it works
Let’s look at how the protocol works using Alice and Bob as an example. Let’s imagine that Alice has decided to deposit $1000 as a liquidity provider. She can add funds to the pool in the form of any of the supported stablecoins in any proportion. When Alice makes the deposit, the protocol mints her 995 LPT tokens (assuming that 1 LPT token was worth $1 at the time of the deposit), which represents her share of the liquidity pool. Meanwhile, the protocol takes a $5 or 0.5% commission on Alice’s deposit and adds it to the liquidity pool as a profit, which is further distributed among the pool participants who added liquidity before Alice, in proportion to their shares, thus increasing the value of the LPT token.
Now let’s imagine that Bob saw an arbitrage opportunity and decided to take a flash loan. He borrowed $100,000 DAI and paid it back within the same transaction with $100,100 USDC, where $100 is the protocol fee that goes to the liquidity pool as a profit, which is distributed among the liquidity providers in proportion to their share in the pool and thus increases the value of the LPT token.
Let’s assume that after some time when Alice decided to withdraw her funds from the pool, the LPT token is already worth $1.2. In this case, when exchanging 995 LPT tokens, Alice will get $1194, thus recording a profit of $194 or 19.4% of her initial deposit.
The first and most obvious use case is the arbitrage between DEXs and other DeFi protocols.
The other, less obvious one is the exchange of stablecoins with lower commissions. And while such popular DEXs as Uniswap or Sushiswap have a fee of 0.3%, HodlTree’s commission is three times lower.