How Does a Flash Loan Facilitate Triangular Arbitrage without Upfront Capital?
A flash loan allows a user to borrow an uncollateralized sum of capital, provided the loan is repaid within the same blockchain transaction block. An arbitrageur uses the borrowed capital to execute the three-step trade sequence (A to B, B to C, C back to A).
If the arbitrage is profitable, the profit is used to repay the loan plus a small fee, and the remainder is kept as profit. If the repayment fails, the entire transaction is reverted, protecting the lender.
Glossar
Flash Loan
Mechanism ⎊ A flash loan is a unique, uncollateralized loan mechanism in decentralized finance that allows users to borrow assets for a very short duration, typically within a single blockchain transaction.
Triangular Arbitrage
Arbitrage ⎊ Triangular arbitrage, within the context of cryptocurrency derivatives and financial markets, exploits temporary price discrepancies across three distinct markets or exchanges for the same underlying asset or related instruments.