What is a Flash Loan Arbitrage Bot and how does it work in DeFi trading?
A flash loan is an uncollateralized loan provided using DeFi protocols such as Aave or DyDx. It enables users to borrow huge amounts of cryptocurrency immediately; but, the full transaction (borrow, use, and refund) must take place within a single blockchain transaction. If the loan is not repaid immediately, the entire transaction fails.
How the Flash Loan Arbitrage Bot Work
1. Price Scan: The bot continually checks prices across several DEXs (including Uniswap, SushiSwap, and Balancer).
2. Identifying opportunities: Flash loan bot recognises when an asset's price falls on one exchange and rises on another.
3. Flash Loan Execution: The bot obtains funds (such as ETH) using a flash loan.
4. Buy low and sell high:
- Purchases the underpriced token on DEX A.
- Sells it for a greater price on DEX B.
5. Loan repayment: In a single transaction, the profit is used to pay back the flash loan.
6. Profit Capture: If completed successfully, the bot retains the price difference as pure profit.
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