In the new financial world, secured by blockchain, there are alternatives to classic instruments, such as deposits, futures, ETFs, and loans. Loans, which are considered the cornerstone of financial institutions, including the most prominent investment opportunities and ventures, use low-interest loans for rapid scaling. In everyday life, loans and microloans are used everywhere – from credit lines to mortgages; people use loans to secure their financial activities.
From Traditional Loans to Flash Loans
Classic financial institutions use complex KYC processes and law enforcement to avoid potential losses if loan debts are not replenished. This is possible in the scope of a single regulation or one legal sphere, where a person can be easily identified, and some restrictions might be applied.
What happened to loans when they met decentralized finances in the blockchain world? In anonymous and hardly regulated fields, cryptocurrency-backed loans seem irrational and risky for loaners with no proper regulation and status.
In the early stages of Defi, the only way to borrow crypto was collateral providing, or in other words – loans secured with a deposit of another crypto. To get your loan, you must deposit a higher amount of other cryptocurrencies, guaranteeing that you’ll pay back borrowed money. This was an exciting instrument, used in 2 scenarios – when a person doesn’t want to sell his asset, keeping belief in a higher price after some time, or when some exact token is needed for some transaction. Instead of swapping, a person may deposit one currency and get another one, use it and then pay it back, releasing his initial asset. This is a beneficial instrument, but it’s not solving the main problem solved by traditional loans – it’s not giving you a large sum of money when you need it. Instead of helping people, who need extra money, loans are just another transactional opportunity to earn. This loan form is similar to classic pawnshops, where you can leave in plus and then repurchase it at a fixed price.
While it’s still problematic to give money without proper KYC and the option to get back the unpaid amount, smart contracts seem to have enough potential to solve it. Doing septs towards indeed replacing loans of the traditional world with crypto loans should be a milestone towards a decentralized alternative to banking.
One of the popular ways of crypto loans is a Flash Loan.
What is a Flash Loan Arbitrage Bot?
A Flash loan is a type of peer-to-peer loan which requires no collateral. Instead, it has strict timing for replenishment, and borrowed money can be used in minimal ways, with no option to cash out or leave borders of the exact project. Regulated via smart contract, a flash loan creates a temporary transaction, depositing money on a loanee’s wallet with a clear use-case description, what can be done with that money, and when the loanee should pay it back. Upon the loan due date, many transactions originating from the loan transaction are invalidated if money is not returned. Inside one big and rich ecosystem of DeFi products, the flash loan helps do the big-size transaction with not much real money involved. Historically, flash loans are created for tech geeks and blockchain enthusiasts, who can deploy automatic payment mechanisms from the command line straight to the blockchain, maximizing communication between machines with almost no human interaction. This is still not a value of traditional loans, but the principle of getting money when you don’t have it is preserved.
At this stage, flash loans’ main use case is related to the same people who use crypto loans to swap one asset for another, do a transaction and then pay the debt, with profit on top of it. Now, the whole transaction is more secure; it’s entirely on-chain, and what’s most important is that the trader does not need a large amount of money reserved inside the system to access a large-sum transaction. For market making and trading – flash loans are very much required instruments.
What exactly happens when someone takes a flash loan? One smart contract is requesting another one to organize a transaction of borrowing money, then asks the other contract to execute a trading transaction with assets that should be obtained from the first contract’s call. When this happens, the second contract runs a trading transaction, which generates some crypto assets, which are then used to replenish initial debt. So in one single transaction, money is lent, then converted to another currency via a selling operation. The debt amount is paid with interest and what’s left is a profit for the loanee, who takes the trader’s role in this scenario. If the loanee cannot pay back the loan, the whole previous transaction is canceled by regulating smart contract, so the money transfer is reversed and sent back to the loaner. This is a brilliant strategy when the trader risks only transaction fees and can trade with very high sums, risk-free for both lender and loanee, effective for the platform, and genuinely powered by blockchain and maths. Here people are using the whole power of smart contracts to achieve a new financial balance of forces. Many high-cost transactions are replaced by one (which means only a one-time gas fee), which is secure and a win-win for every party.
This seems an easy process, but objectively, this requires a high level of tech skills to create a properly working arbitrage bot, a high level of math skills, and deep expertise in crypto to organize algorithmic, scientifically correct operations flow for flash loan bot. The flash loan arbitrage bot development market is small; it’s fraudulent and super competitive.
How do Flash Loan Arbitrage Bots Work?
Now, flash loan arbitrage bots are an alternative to classic trading bots, where logic if you invented mechanism, how to do it, there are few options – to do arbitrage it on your own with a small pool (let’s say USD 5000 rollover and USD 20 revenue from the transaction), to sell functioning bot to the trader, who’ll organize a pool of USD 500,000 and revenue from the transaction will be USD 2000, so he’ll not hesitate to pay USD 10000 to one who sells bot, which is a far better bargain for developer, instead then earning this sum in few hundred transactions. The logical conclusion of these two paths and their evolution can be found in teaming up when tech-savvies meet advanced crypto traders, bringing tech, algorithm, knowledge, and dedication to the table to share upcoming profit.
With money taken from smart contracts, the flash loan arbitrage bot can regularly organize high-scale operations if the bot is working correctly. His activities are under control, with a high level of maintenance and constant improvements. Nowadays, deploying bots in the cryptosphere is a chess-like process, when every next step should be deeply analyzed to achieve maximal results.
Exio.Tech with the deep domain expertise of blockchain, bots, and DeFi, is looking for partner investors interested in having such arbitrage bot. Our team has done massive research in this field and calculated all the risks. Now we are ready for a partnership to create a flash loan bot in collaboration with a company and share profits.