If 2017 was the year that initial coin offerings (ICOs) took a parabolic trajectory, then perhaps 2020 is the year that decentralized finance (DeFi) products are on everyone’s lips.
With the advent of numerous offerings such as flash loans, where people can borrow money without having to post collateral as long as they pay it back within the same block, tech-savvy enthusiasts are taking advantage of these opportunities to earn significant profits.
What are DeFi flash loans?
DeFi has opened up many opportunities for many people. The options are diverse, from particularly profitable yield farming projects to taking out loans without collateral.
Traditional cryptocurrency lending requires users to deposit some form of collateral – traditionally in the form of cryptocurrencies.
However, flash loans are different. With them, users can borrow money without having to deposit collateral. The only catch is that they would have to repay the loan within the same block. If this criterion is not met, the contract is void and as if it never existed.
How someone made $16,000 with a $0 investment
Using the above mechanisms, tech-savvy users can create smart contracts, where they exploit the price differences of different cryptocurrencies across the numerous DeFi protocols.
That’s exactly what one user did and he made $16,182 in seconds with no investment whatsoever, just some loose change for gas fees.
Block 10566089 shows that the user did the following.
First, he borrowed 2,048,000 USDCT through dYdX’s quick loan. Remember: since it is a short-term loan, it does not need to post any collateral as long as it repays the amount within the same block.
He then exchanged that amount for 2,028,367 DAI on Curve y Pool. He then traded the DAI for 2,064,182 USDC in Curve’s SUSD pool and finally repaid the 2,048,000 USDC to dYdX, all within the same block.
All of this is possible due to the different stablecoin rates on the different lending protocols. And while a 1% difference doesn’t seem like much, if you can borrow large amounts and arbitrate that difference, the gains can be significant.
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