Flash Loan

⭐ 1. What Is a Flash Loan?

A flash loan lets you borrow ANY amount of money with no collateral,
as long as you return it within the same Ethereum transaction.

This is possible only because:

• Ethereum transactions are atomic

• A transaction either fully executes

• Or fully reverts

Meaning:

✔ Borrow 10M
✔ Use it
✔ Return 10M + fee
✔ Profit

❌ If you fail to return →
→ Transaction reverts →
→ It's like nothing ever happened →
→ Protocol loses zero funds.

So flash loan = risk-free for the lender.

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⭐ 2. How Flash Loans Are Possible

Core idea:

“No collateral needed because the loan is never really at risk.”

Why?

Because the borrower never “gets” the loan in a separate state.
Every action happens inside one atomic transaction:

1. Aave sends you 10M DAI
2. You use it (arbitrage, liquidation, swap)
3. You repay 10M + fee
4. If repay() NOT called → revert

Ethereum state never moves to Step 3 unless Step 2 succeeds.

This is why this can exist ONLY in smart contract blockchains.

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⭐ 3. Under the Hood (What Aave / DyDx Do Internally)

A flash-loan provider smart contract does:

1. Send tokens to your contract

2. Call your executeOperation() function

3. Your code must do:

   • Arbitrage

   • Liquidation

   • Multi-DEX swaps

   • etc.

4. At the end, your contract must return:

   • Amount borrowed

   • • fee

5. The provider checks balance:

   require(currentBalance >= amount + fee);
   

6. If not → revert the entire transaction

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⭐ 4. A Visual Step-by-Step

Let’s say you want to borrow 1,000,000 USDC for an arbitrage.

Inside one Ethereum transaction:

Step 1: Aave -> yourContract (1,000,000 USDC)
Step 2: yourContract executes arbitrage on Uniswap/SushiSwap
Step 3: yourContract repays 1,000,900 USDC (fee)
Step 4: If repay ok -> SUCCESS
Step 5: If repay not ok -> REVERT (everything undone)

If arbitrage makes 10,000 USDC profit:

• You keep profit

• Aave gets loan+fee

• No risk

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⭐ 5. Flash Loan Code Example (Aave v2 Style)

Below is realistic flash-loan smart-contract code.

This is the core pattern ALL flash-loan arbitrage bots use.

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📌 STEP 1 — Import Aave Interfaces

pragma solidity ^0.8.20;

import {ILendingPool} from "./ILendingPool.sol";
import {IERC20} from "./IERC20.sol";

---

📌 STEP 2 — Start the Flash Loan

function startFlashLoan(address asset, uint amount) external {
    address lendingPool = 0x....;  // Aave lending pool address

    ILendingPool(lendingPool).flashLoan(
        address(this),   // who receives the loan
        asset,           // token you want to borrow
        amount,          // how much
        ""               // params passed to executeOperation()
    );
}

---

📌 STEP 3 — Aave Calls Back Into Your Contract (executeOperation)

Aave ALWAYS calls this function when you borrow.

This is where you:

• Perform arbitrage

• Do liquidation

• Or any multi-move trade

function executeOperation(
    address asset,
    uint amount,
    uint premium,
    address initiator,
    bytes calldata params
)
    external
    returns (bool)
{
    // STEP A: You now have 'amount' tokens to use.
    // Perform arbitrage:
    // buy cheap on Uniswap, sell expensive on SushiSwap, etc.

    uint profit = doArbitrage(asset, amount);

    // STEP B: Repay loan + fee
    uint amountOwing = amount + premium;

    IERC20(asset).approve(msg.sender, amountOwing);

    // Any leftover tokens = pure profit

    return true; // Return true signals everything is safe
}

---

📌 STEP 4 — Arbitrage Logic Example (Simple)

This is extremely simplified, but shows the idea.

function doArbitrage(address token, uint amount) internal returns(uint) {
    // swap token -> ETH on Uniswap
    uint ethReceived = Uniswap.swapExactTokensForETH(amount);

    // swap ETH -> token on SushiSwap (for profit)
    uint tokensBack = SushiSwap.swapExactETHForTokens(ethReceived);

    require(tokensBack > amount, "No profit");

    return tokensBack - amount; // profit
}

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⭐ 6. What Happens If Arbitrage Isn’t Profitable?

Imagine:

• Borrowed 1M USDC

• Arbitrage loses money or fees are too high

• You return < 1M + fee

Then:

REVERT

Everything gets undone:

• Flash loan is cancelled

• Trades are cancelled

• No loss to LPs

• No loss to Aave

• No partial execution

Atomicity = “all or nothing”.

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⭐ 7. Why Flash Loans Are So Powerful

They let you:

🔥 Arbitrage

Buy on cheap exchange → sell on expensive exchange

🔥 Liquidations

Borrow funds → repay someone's debt → claim collateral → repay → keep profit

🔥 Debt refinancing

Move a loan from one platform to another in seconds

🔥 Leverage

Borrow → buy collateral → borrow more → loop

🔥 Oracle attacks (dangerous)

Manipulate prices → exploit

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⭐ 8. Real-World Arbitrage Using Flash Loans

Example trade:

1. Borrow 5M USDT from Aave

2. Buy ETH from Uniswap (price lower)

3. Sell ETH on Curve (price higher)

4. Repay 5M + fee

5. Keep difference (e.g., 20k profit)

This loop happens in 1 single transaction.

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⭐ 9. Real Flash Loan Arbitrage Bot Logic (High Level)

startFlashLoan(USDT, 5,000,000)
    ↓
executeOperation()
    ↓
Check price differences
    ↓
If profitable:
    - Buy ETH on Uniswap
    - Sell ETH on Curve
    - Repay loan + fee
    - Keep profit
Else:
    revert

Bots run this EVERY block.

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⭐ 10. Behind the Scenes: Why Flash Loans Work

Flash loans exist because:

✔ Ethereum transactions are atomic
✔ Smart contracts can revert entire history if something fails
✔ Lending protocols know borrowers cannot escape repayment
✔ Liquidity is always returned instantly

Thus:

• Zero risk to lender

• Full power to borrower

• All within 1 transaction

This is impossible in traditional finance.

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⭐ 11. Flash Loan Key Benefits

Benefit	Description
Zero collateral	Borrow millions with nothing
Atomic safety	Cannot steal loan
Instant	Borrow + repay in same transaction
Composable	Can combine 10 different protocols
Powerful	Enables advanced strategies

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⭐ 12. Flash Loan Security

Protocols must:

• Use checks-effects-interactions pattern

• Verify repayment BEFORE finalizing state

• Protect against reentrancy

• Avoid relying on manipulable AMM oracles

• Avoid underpricing fees

Flash loans have caused many hacks, but the loans aren’t the problem —
protocols using bad price oracles are.

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⭐ Final Summary

Flash Loans allow borrowing any amount with no collateral because the loan is guaranteed to be repaid within the same atomic transaction.

The borrower gets funds → performs arbitrage or liquidation → returns principal + fee.

If repayment fails, Ethereum reverts the entire transaction, ensuring no loss to lender.

Flash loans power arbitrage, liquidations, MEV, and advanced DeFi operations by leveraging atomic composability.