The Mechanics of Debt Refinancing Across Protocols

Detailed Instructions

Begin by thoroughly auditing your current debt position. This involves checking your Loan-to-Value (LTV) ratio, collateral type, interest rate model, and any associated fees on the originating protocol (e.g., Aave, Compound). Simultaneously, scan the broader DeFi market for better terms. Use analytics platforms like DeFi Llama or Zapper to compare real-time variable and stable interest rates across protocols.

• Sub-step 1: Query your position's health factor and liquidation price using the protocol's UI or direct contract calls.
• Sub-step 2: Calculate the total cost of your current loan, including variable interest accrual and any potential exit penalties.
• Sub-step 3: Identify 2-3 target protocols (e.g., switching from MakerDAO to Aave V3) offering lower rates or more favorable collateral factors for your assets.

Tip: Consider gas fees and network congestion; a marginally lower rate may not be worth the transaction cost.

Detailed Instructions

Flash loans are the cornerstone of atomic refinancing, allowing you to borrow without upfront collateral as long as the debt is repaid within one transaction block. You will use the flash loan to repay your existing loan in full, freeing your original collateral to secure a new loan on a different protocol. First, determine the exact amount needed, which is the sum of your debt principal plus accrued interest.

• Sub-step 1: Choose a flash loan provider (e.g., Aave's Flash Loan facility, Uniswap V3, or dYdX).
• Sub-step 2: Structure your transaction logic in a smart contract. The contract must first receive the flash loan, then execute a series of precise actions.
• Sub-step 3: Encode the calls to repay the old protocol and deposit collateral into the new one. For example, to repay a Compound cDAI debt:

solidityCopy
// Pseudocode for a refinancing contract action
IERC20(DAI).approve(cDAI_Contract, debtAmount);
CErc20(cDAI_Contract).repayBorrow(debtAmount);

Tip: Always factor in the flash loan fee (e.g., 0.09% on Aave) and ensure your contract's executeOperation function correctly handles all approvals and swaps.

Detailed Instructions

This step involves submitting the single, atomic transaction that encompasses the entire refinancing operation. The transaction will call your deployed contract, which interacts with multiple protocols sequentially. Atomic execution is critical—if any sub-action fails (e.g., insufficient liquidity, slippage), the entire transaction reverts, protecting you from being stuck with a flash loan you cannot repay. Use a transaction builder like Ethereum's Multicall or a specialized DeFi aggregator (1inch, Paraswap) to bundle calls.

• Sub-step 1: Deploy your audited refinancing smart contract to the network (e.g., Ethereum Mainnet, Arbitrum).
• Sub-step 2: Initiate the flash loan, specifying the asset (e.g., 100,000 DAI) and the contract address as the receiver.
• Sub-step 3: The contract autonomously executes: repays old loan at 0x3d981... (Compound), withdraws freed collateral (e.g., WETH), deposits it into the new protocol at 0x87870... (Aave V3), and takes out a new, smaller loan.
• Sub-step 4: Finally, the contract repays the flash loan principal plus the fee, sending any leftover funds (your realized savings) back to your wallet.

Tip: Set a high gas limit and use a gas tracker to submit during low-congestion periods to minimize costs.

Detailed Instructions

After a successful refinance, proactive management is essential. Your new position will have a different health factor and liquidation threshold. Set up monitoring tools to alert you if market volatility threatens your collateral value. Utilize DeFi management dashboards (like DeBank or Instadapp) to track your net APY, including the new interest rate and any rewards (e.g., Aave's stkAAVE incentives).

• Sub-step 1: Bookmark the new loan's interface and note the contract address (e.g., Aave aToken: 0x028171bCA77440897B824Ca71D1c56caC55b68A3).
• Sub-step 2: Implement automated alerts for when your LTV exceeds 70% or the health factor drops below 1.5.
• Sub-step 3: Regularly reassess the landscape; be prepared to repeat the workflow if rates shift by more than 0.5% APY in your favor elsewhere.
• Sub-step 4: Consider using debt recycling strategies by leveraging the improved terms to borrow more capital for yield farming, further optimizing your overall returns.

Tip: Keep a transaction log with hashes (e.g., 0xabc123...) and dates for each refinance to calculate your annual savings and inform tax reporting.

Detailed Instructions

Begin by conducting a comprehensive on-chain position audit using tools like DeFi Llama or Tenderly to map all your debt obligations. The goal is to identify the most expensive liabilities to refinance first. You must analyze key metrics including the Annual Percentage Rate (APR), loan-to-value (LTV) ratio, and any associated liquidation penalties.

• Sub-step 1: Query your positions: Use a blockchain explorer or subgraph to list all active loans, their collateral amounts, and debt tokens. For example, find your Aave V3 Ethereum position.
• Sub-step 2: Compare rates: Use a rate aggregator API (e.g., DefiLlama's) to fetch real-time borrowing rates across protocols like Compound, Aave, and Euler. Target rates at least 50 basis points lower for refinancing to be profitable after gas.
• Sub-step 3: Assess eligibility: Verify you meet the target protocol's collateral and health factor requirements. Calculate the new projected health factor post-refinance.

Tip: Always factor in gas costs and potential slippage during the swap phase of the operation, as these can erode savings.

Detailed Instructions

The core of automation is constructing a flash loan-enabled atomic swap. This ensures the old debt is repaid and the new debt is drawn in one block, eliminating the risk of being liquidated in between transactions. You will use a smart contract router like Instadapp's DSA or a custom contract using Foundry.

• Sub-step 1: Structure the flow: The sequence is: 1) Flash loan the debt amount, 2) Repay the old protocol, 3) Withdraw collateral, 4) Supply collateral to the new protocol, 5) Borrow from the new protocol, 6) Repay the flash loan.
• Sub-step 2: Encode calls: Use ethers.js or viem to encode the calldata for each interaction. For Aave V3 on Ethereum, the repayment call would target the pool contract 0x87870Bca3F3fD6335C3F4ce8392D69350B4fA4E2.
• Sub-step 3: Calculate minimum amounts: Set slippage tolerances (e.g., 0.5%) for any DEX swaps involved in converting debt tokens.

Tip: Test the entire bundle on a forked mainnet (using Anvil) with a small amount first to verify logic and gas estimates.

Detailed Instructions

Manual execution is inefficient. Implement an automated keeper using Gelato Network or OpenZeppelin Defender to monitor rates and trigger your bundle. The trigger logic should be based on dynamic rate differentials and your wallet's health factor safety margin.

• Sub-step 1: Define trigger conditions: For example: if (newProtocolRate < oldProtocolRate - 0.75%) AND (projectedHealthFactor > 1.5) then execute. Store these as environment variables.
• Sub-step 2: Deploy a task: On Gelato, create a web3 task that calls your router contract's executeRefinance function. The fee can be paid in ETH or dedicated tokens.
• Sub-step 3: Fund the keeper: Ensure your Gelato task or Defender relayer has enough funds to pay for gas on the target chain. For Ethereum, keep at least 0.1 ETH in the task balance.

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// Example Gelato / Defender Autotask snippet
const conditionMet = await checkRateDiff(
  '0xA0b869...c2', // USDC on Aave
  '0x39AA39...34'  // USDC on Compound
);
if (conditionMet) {
  const tx = await routerContract.executeRefinance(flashLoanAmount, routeData);
  await tx.wait();
}

Tip: Include a cooldown period (e.g., 24 hours) in your logic to prevent excessive, unprofitable executions during volatile markets.

Detailed Instructions

After execution, the work is not done. You must implement real-time monitoring to guard against sudden rate hikes or collateral value drops in the new protocol. Use services like Tenderly Alerts or Pythia to track your position's key metrics.

• Sub-step 1: Set up health factor alerts: Configure an alert to trigger if your health factor on the new protocol (e.g., Aave) falls below a threshold like 1.7. This gives you a buffer before the 1.0 liquidation threshold.
• Sub-step 2: Monitor rate arbitrage: Continue tracking borrowing rates. If the rate in your new protocol becomes higher than another available protocol, your automation script should be ready to trigger another refinancing cycle.
• Sub-step 3: Log and analyze: Record every execution's gas cost, savings achieved, and final health factor in a database or spreadsheet. Analyze this data monthly to optimize your trigger thresholds and profitability.

Tip: Consider insuring your position through protocols like Nexus Mutual or Unslashed Finance to hedge against smart contract risk or oracle failure, especially for large debt amounts.