Understanding Flash Loans and Arbitrage

YVISION
3 min readJun 9, 2021

Surely most of the market participants know about arbitrage and flash loans and even use these strategies in some way to make a profit, because they can be extremely effective, especially in the face of changing market sentiment. However, it is worth briefly highlighting these concepts. According to the Investopedia, arbitrage is the simultaneous purchase and sale of the same asset in the different markets in order to profit from differences in the asset’s listed price. It exploits short-lived variations in the price of identical or similar financial instruments. Arbitrage exists as a result of market inefficiencies and it both exploits those inefficiencies and resolves them.

The most interesting thing about arbitrage is that it involves no negative cash flow — in simple terms, it is the opportunity of a risk-free profit after transaction costs. So, if you can buy something for a low price and sell it for a higher price at the same moment minus transaction costs and get profit — that’s an arbitrage.

Okay, but how is it possible without having an asset used for arbitration on your account? Moreover, how can this be done in the context of decentralized finance? This is where Flash Loans come into play.

In the case of using CEXes, if the exchange with higher asset price allows it, you can borrow the missing asset there until the purchased asset on the exchange with the lower price arrives to repay the loan. But with DEXes, you cannot do this in such an easy way. There are too many transactions you have to do to make profit from this time-limited opportunity. But with Flash Loans you can handle it, even if your own balance is zero.

The uniqueness of Flash Loans is that anyone is able to get an uncollateralized loan of any amount if it will be returned with the transaction in the same block. The best part is that it guarantees the flash speed of your arbitrage trade — which is what is needed for successful arbitraging. Moreover, if your trade potentially results in a loss and you are unable to repay the loan, the entire combination of transactions will be reverted and all the actions that have already been executed will be undone. This mechanism guarantees the safety of funds in the vaults.

But arbitrage isn’t the only option flash loans allow. They can also be used for collateral swapping, liquidations or rebalancing, and many more. And all of these options will be available for use with the Yvision platform for generating the best and the most efficient strategies. The mechanics of the arbitrage protocol will be described in more detail in subsequent articles, meanwhile, subscribe to our socials so as not to miss updates.

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Useful links:

https://github.com/aave/aave-protocol/blob/master/docs/Aave_Protocol_Whitepaper_v1_0.pdf

https://arxiv.org/abs/1904.05234v1

Stay tuned,

YVISION TEAM

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YVISION

All-in-one yield generation platform. Yvision leverages the entire DeFi ecosystem to bring a simple solution for stakers, yield farmers and arbitrageurs.