Hello everyone,

I hope you all are having a great day, welcome to CryptoGod-1's blog on all things Crypto. In this post I will be looking at a very interesting topic in Flash Loans. Many people have probably come across this terminology before, and may have some understand of how it works. Many others will know what it means but have no idea how to make use of it. I hope to give a decent explanation below on what Flash Loans are, how they came about, how they can be used, and how to execute one via a Smart Contract.

What is a Flash Loan?

A Flash Loan is one of the most interesting and probably most difficult things to grasp when it comes to decentralized finance (DeFi). In simple terms, Flash loans are an uncollateralized form of lending within the DeFi space. They provide a novel and unique method of gaining finance thanks to the technology of blockchain. They are used by traders primarily in profit trading strategies such as arbitrage and collateral swaps. In real world finance there are primarily two methods of gaining finance, secured and unsecured loans. Even in the world of CeFi and DeFi users generally need collateral to secures loans such as margin trading, or to borrow funds in Defi programmes such as Compound or Maker. Generally these loans are overcollateralized via the borrowers assets, such as crypto, to ensure they repay the loan.

Flash loans are unique in the way they make use of smart contracts within the blockchain. They allow users to borrow vast sums of crypto, but are required to be repaid back within the same transaction of the smart contract. Generally this is seconds or less, meaning the mechanisms in place prevent funds from changing hands unless specific conditions are met within the smart contract. In the event of a flash loan, the intelligent contract reverses the transaction is the borrower is unable to repay the loan, making it appear as though the loan never occurred. In other words, if you don't set up the smart contract to be profitable and cover all the associated fees when taking the flash loan, the blockchain will cancel it before the transaction is complete and neither the lender nor the borrower will be out of pocket.

The coins given as part of the Flash Loan are sourced from DeFi lending, in other words when users stake their crypto to earn rewards. The Lending Platform takes the staked crypto from user A and gives it to user B as part of the Flash Loan. This allows user B to make user of assets they don't own, but ensures they will pay them back, and helps user A to gain interest from their assets being loaned out.

Benefits of Flash Loans

Generally when taking a loan it requires time and processes to get approved, and is paid back over a period of months or years. As flash loans are instant, they cannot be used for things like buying a car or a house. Instead, they are excellent facilitators for making use of the vast applications available in DeFi, and most importantly, making a lot of money without putting your own finances at risk. The quickness of the loan means it can be tricky for users not familiar with smart contracts to execute them correctly, and it requires user to be quick with their rapid loan. Some of the most beneficial uses of flash loans include the following:

• Arbitrage: This is a technique where a trader spots a difference in price of a coin between exchange A and exchange B. The trader buys the coin on exchange A and sells on exchange B. Assuming the difference in price is enough to cover any fees, the trader will have made a profit. Through Flash Loans, traders can trade higher amounts than they would simply by trading their own funds. Draw backs with this are the ever changing prices on exchanges, so if a trader is not quick they may loose the opportunity to complete the arbitrage.

• Collateral swaps: Collateral swaps allow a user to borrow an asset from a lending protocol, such as Aave or Compound, by providing collateral. With a Flash Laon a user can change the collateral used for that loan without the requirement of paying back the initial loan, instead using the loan to take out the stored collateral, swapping it on an exchange, and paying back the loan.

• Reduced transaction fees: The transaction fees are reduced because when using a flash loans it combine several transactions into a single transaction in some cases. The cost of the transaction is deducted from the loan amount, meaning rapid loans generally but not always result in lower fees.

AAVE

Aave is an opensource DeFi protocol. Users connect via their wallet, and immediately have access to all the available functions. 

The fee for taking a Flash Loan, no matter what amount, is always set at 0.09% of the amount taken. This is quite an incredibly small fee compared to traditional loans, or even loans taken on CeFi exchanges. The reason for this is because the lender is guaranteed to receive the full amount of their loan back, and the borrower will be paying the fee from any profits made. The loan will not execute if the loan does not make profits of more than the fee, so in this case everyone is a winner - except whichever exchange the loan made the profits from.

Uniswap

Uniswap is one of the most popular decentralized exchanges available, and they offer Flash Loans via a service known as Flash Swap.

These flash swaps allow users to withdraw up to the full reserve of any available ERC20 token on Uniswap. After that, users can make use of arbitrage or other features while having no upfront cost. All a user has to ensure is they either pay for the withdrawn ERC20 token with a corresponding pair token, or return the withdrawn ERC20 token along with a fee. These swaps remove the requirement for upfront capital and remove and constraints when making use of multi-step transactions on Uniswap.

Furucombo

This is an app, still in Beta stages of development, as part of the world of DeFi and one of its main purposes is to help facilitate users is getting and making use of smart contracts including the use of Flash Loans. No matter how limited their technical knowledge is, the interface makes it easy and understandable for any user to create their own blocks of a contract. Available on both the Ethereum and Polygon Networks, all a user needs to do is log in with their wallet, generally MetaMask, and begin the process of creating Flash Loan smart contracts.

When looking for arbitrage opportunities it is key to look at the trading volume of coins and token. Higher trading volumes is key to finding fluctuations and arbitrage opportunities. The top 10 cryptos are generally good options, and when doing arbitrage it is helpful to take a loan in stable coins such as USDT, USDC, as they price for those rarely change. 

An example is taking a loan of 100 USDC on AAVE, swapping it for 0.03 ETH on Uniswap, then swapping the 0.03 ETH for 102 USDT on Sushiswap. The contract will then repay the loan of 100.09 USDT and you will retain the additional USDT gained of 1.01 USDT, minus any network fees.

The above example is just made up figures but it gives an understanding about the general idea behind Flash Loans and making profit from them. Furucombo includes the network fee costs when creating the smart contract for you, so you know before executing it that you will be in profit. It also has a function of updating prices so that users are getting price action information in real time.

The app is available here - https://furucombo.app/

Smart Contracts & Writing Your Own Flash Loan

While the above option work in doing the hard part of a flash loan for you, many users who make beneficial use of flash loans do so by writing their own smart contracts. As Flash Loans are a feature designed for developers, having a strong technical knowledge can be very beneficial in writing your own Flash Loan Smart Contract. To build a contract for a flash loan the creator must ensure that the amount of asset borrow is returned within the same block transaction, meaning no upfront collateral will be required. The contract will request a Flash Loan from whichever provider it is instructed to request it from, and execute the instructed steps in order, before then paying back the loan and any interest or fees which have occurred, all within one transaction. Having a strong knowledge of writing smart contracts is imperative for this, as a newbie could end up missing a key step and then once they execute their contract it could end up either costing them, or not working at all. Having additional software which searches for arbitrage opportunities can be key for the smart contract, and a very technical minded person could set up a bot which searches for arbitrage opportunities. Once the bot has found one which will result in profit, a automatic Flash Loan Smart Contract will kick in and earn the user profit. There are many substandard ones available on the market, but being at a level where one can write their own Bot and Smart Contracts would be the desired level to achieve.

An interesting link is available here: https://moralis.io/how-do-flash-loans-work-full-walkthrough/

This is a tutorial with its own code available for download which walks users through creating their own Flash Loan lab. While it can still be tricky to understand and make work, watching the video and following the tutorials can at the very least help give a stronger and more informed understanding of how creating ones own smart contract for Flash Loans works.

Conclusion

As one of the most interesting and nuance way of making money in the revolutionary world of DeFi, Flash loans allow users to access sums of money without the requirement of any collateral upfront. They allow people to access these funds regardless of their socioeconomic backgrounds, opening up a new method of finance for all. The catch? The funds are only available for the length of a transaction on the blockchain, meaning they are gone as soon as you get them. Even with this limited amount of time, users can avail of a host of different opportunities including arbitrage, collateral swaps, and reducing their transaction fees. There are a variety of sites available for users to take out a flash loan, while the more tech savvy users could most likely write their own smart contract. Making money through this opportunity requires speed and knowhow, but for anybody who finds the correct opportunity and avails of a flash loan, regardless of the amount borrowed, they can be certain of profits on the other side. With minimal loan fees, as low as 0.09% on some sites, all a user needs to do is ensure their transaction will cover the flash loan fee and transaction (gas) costs to make their profits, which could range for a couple of hundred dollars into the millions. All in all they are a positive feature of the DeFi space and while they are complicated to understand, let alone enact, once a user gets familiar they can lead to an excellent extra source of income.

Thanks very much for reading and I hope you enjoyed the article.

Have a great day.

Peace. CryptoGod-1.

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