How Can Flash Loans Be Used for Arbitrage in DeFi?
Flash loans allow users to borrow large amounts of cryptocurrency with no upfront collateral, provided the loan is repaid within the same blockchain transaction. Arbitrageurs use flash loans to borrow massive capital, execute a multi-step arbitrage trade across different DeFi protocols, and repay the loan plus a small fee, all in a single atomic transaction.
This allows for capitalizing on large-scale arbitrage opportunities without needing significant personal capital. The entire process fails if the arbitrage is not profitable enough to repay the loan.
Glossar
Flash Loans
Mechanism ⎊ Flash loans represent uncollateralized lending protocols within decentralized finance, enabling users to borrow and repay funds within the same transaction block; this functionality is predicated on the deterministic nature of blockchain execution, eliminating credit risk for lenders.
Flash Loan
Mechanism ⎊ A flash loan represents an uncollateralized loan executed entirely within a single blockchain transaction, enabling borrowers to access substantial capital for a very short duration, typically seconds.
DeFi Protocols
Protocol ⎊ Decentralized finance protocols represent a paradigm shift in financial infrastructure, leveraging blockchain technology to automate and disintermediate traditional financial services.