If 2017 was the year where initial coin offerings (ICOs) went parabolic, then 2020 is perhaps the year where products within the field of decentralized finance (DeFi) are all the rage.
With the emergence of numerous propositions, such as flash loans, where people can borrow money without having to post collateral as long as they repay it within the same block, tech-savvy enthusiasts are using these possibilities to arbitrage for substantial profits.
What Are DeFi Flash Loans?
DeFi has brought many opportunities for a number of people. From particularly profitable yield farming projects to taking loans without collaterals, the possibilities are plenty.
With a conventional cryptocurrency loan, users are required to post some sort of collateral – traditionally in the form of crypto.
Flash loans, however, are different. With them, users can borrow funds without having to post any collateral. The only catch is that they’d have to repay the loan within the same block. If this criterion isn’t met, the contract will be void and as if it never existed.
How Someone Made $16,000 With $0 Investment
Using the above mechanics, tech-savvy users can create smart contracts where they’d take advantage of the discrepancies between the price of different cryptocurrencies on the numerous DeFi protocols.
This is exactly what one user did, and he made $16,182 within seconds, using absolutely no investment but some pocket change for the gas fees.
Seen in block 10566089, what the user did was the following.
First, he borrowed 2,048,000 USDCT using dYdX’s flash loan. Remember, because it’s a flash loan, he doesn’t have to post any collateral as long as he repays the amount within the same block.
He then swapped this amount for 2,028,367 DAI on Curve y pool. After that, he swapped the DAI for 2,064,182 USDC on Curve’s SUSD pool, and lastly, he paid back the 2,048,000 USDC to dYdX, all within the same block.
All of this is possible because of the different stablecoin rate at the various lending protocols. And while 1% difference might not seem like a lot, when one is able to borrow high amounts and arbitrage this difference, the profits can be substantial.