Flash loans were originally designed for developers, but now platforms like Flashloans.com enable less tech-savvy users to take advantage of flash loans by removing the need for technical coding skills.
What are Flash Loans?
With a traditional loan, a lender will usually require some form of collateral or security to ensure the money is repaid back to them. The loan contract usually takes a while to be approved and the borrower pays the loan back over a set term with interest.
Flash loans on the other hand occur in an instant. The funds are borrowed and returned in the space of one transaction. This is made possible through smart contracts which set out the terms and perform instant trades on behalf of the borrower in exchange for a fee. This fee is called a “Gas Fee”.
If the borrower doesn’t repay the loan or the trade doesn’t make a profit, the conditions in the smart contract are not met. The transaction is then reversed, and the funds returned to the lender. Because of the smart contract, there is minimal risk for both the borrower and the lender.
In the traditional finance world, arbitrage is an investment strategy in which an investor simultaneously buys and sells an asset in different markets to take advantage of a price difference and generate a profit. While price differences are typically small, the returns can be impressive when multiplied by a large volume. Arbitrage is commonly leveraged by hedge funds and other sophisticated investors in traditional financial markets.
In the world of DeFi, traders can use an arbitrage strategy to gain benefits by trading between platforms supplying different prices for an asset. Traders can take advantage of a market’s inefficiencies by buying and selling crypto assets at a different price to gain financial benefits.
Let’s take this a step further with a flash loan. By using a flash loan traders can borrow a large sum of money to execute an arbitrage trade on two decentralized exchanges. By combining an instant loan with an arbitrage trading strategy, traders can increase their earning potential.
How does a Flash Loan Arbitrage Work?
Let’s take a situation where you could buy a loaf of bread for a dollar from your mother and then sell that loaf of bread to your neighbour for two dollars. You could easily double your money. You keep taking the money that you have and doubling it. Well, this is exactly what trading arbitrage is. Except with cryptocurrency, you might be able to buy a Token for $100 and then turn around and sell it on another platform for $101. Making a single dollar of profit, right? However, with Flash Loans, you can borrow say $100,000,000 of money that is not yours to do this trade over and over again.
With flash loans, traders can launch an arbitrage without any existing assets. When a price difference is found, traders can instantly borrow a considerable amount of money using a Flash Loan service. Therefore, arbitrage trades using a Flash Loan become “cost-free” as long as the traders can afford the gas fee to launch the transaction.
As you can see Flash Loan Arbitrage is a very powerful tool — it’s fast, innovative and available to everyone! We look forward to bringing the flash loan service to you via the Flashloans.com platform.