What Is the Relationship between a Flash Loan and Arbitrage in DeFi?
Flash loans are often used legitimately to facilitate risk-free arbitrage opportunities across different DEXs. An arbitrageur can borrow a token, buy it cheaply on one exchange, sell it for a higher price on another, and then repay the loan with the profit, all within one transaction.
This use is beneficial as it helps to quickly equalize prices across the market. The ability to borrow massive capital without collateral is key to making large-scale arbitrage feasible.
Glossar
Market Efficiency
Arbitrage ⎊ Market efficiency, within cryptocurrency and derivatives, reflects the speed at which mispricing is exploited, diminishing opportunities for risk-free profit.
Risk-Free Arbitrage
Exploitation ⎊ Risk-free arbitrage in cryptocurrency derivatives represents the simultaneous purchase and sale of an asset across different markets, or in different forms, to capitalize on transient pricing discrepancies without exposure to directional risk.
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.