What Are Flash Loans and How to Use Them?

Detailed Instructions

Your first step is to write a smart contract that will initiate and execute the flash loan. This contract must implement the specific interface required by the lending protocol, such as Aave's IFlashLoanReceiver. The core logic revolves around the executeOperation function, which is a callback automatically invoked by the lending pool after it provides you with the borrowed assets.

• Sub-step 1: Inherit the Receiver Interface: Your contract must inherit from the relevant interface, e.g., contract MyArbitrageur is IFlashLoanReceiver.
• Sub-step 2: Define executeOperation: This function must contain your entire profit-generating strategy (e.g., a DEX swap) and must repay the loan plus a fee before the transaction ends.
• Sub-step 3: Request the Loan: Create a function that calls the lending pool's flashLoan method, specifying the asset, amount, and your contract's address.

Tip: Always calculate fees within your contract logic. For Aave on Ethereum mainnet, the flash loan fee is 0.09% of the borrowed amount. Ensure your arbitrage profit exceeds this cost.

solidityCopy
function executeOperation(
    address[] calldata assets,
    uint256[] calldata amounts,
    uint256[] calldata premiums,
    address initiator,
    bytes calldata params
) external override returns (bool) {
    // Your arbitrage logic here
    // ...
    // Repay the loan + fee
    uint256 amountOwing = amounts[0] + premiums[0];
    IERC20(assets[0]).approve(address(LENDING_POOL), amountOwing);
    return true;
}

Detailed Instructions

With your contract deployed, you now initiate the transaction. This is done by calling a function in your contract that interacts with the lending protocol's pool contract. You must specify the exact asset address, loan amount, and operation mode. For Aave, you call flashLoan on the LendingPool contract at address 0x7d2768dE32b0b80b7a3454c06BdAc94A69DDc7A9 (Ethereum mainnet).

• Sub-step 1: Fund Gas: Ensure your wallet has sufficient ETH to pay for the gas costs of this complex transaction.
• Sub-step 2: Specify Parameters: Define the loan details. For example, to borrow 100,000 DAI, you would use the DAI token address 0x6B175474E89094C44Da98b954EedeAC495271d0F.
• Sub-step 3: Execute the Call: Trigger your contract's function, which will in turn call the lending pool. The pool will send the assets to your contract and then call your executeOperation callback.

Tip: Use a flash loan tool like DeFi Saver or Furucombo for testing, or simulate the entire transaction in a forked mainnet environment using Tenderly or Hardhat before deploying real funds.

javascriptCopy
// Example call data for initiating a flash loan via ethers.js
const lendingPool = new ethers.Contract(LENDING_POOL_ADDRESS, LENDING_POOL_ABI, signer);
await myContract.initiateFlashLoan(
    DAI_ADDRESS,
    ethers.utils.parseUnits("100000", 18),
    "0x" // Optional parameters encoded as bytes
);

Detailed Instructions

This is the core of the flash loan where you must generate profit. The borrowed funds are now in your contract. You have one atomic transaction to use them. A common strategy is a DEX arbitrage, where you exploit price differences between two decentralized exchanges.

• Sub-step 1: Swap on DEX A: Use the borrowed asset to buy another token on a DEX like Uniswap V3 (Router address: 0xE592427A0AEce92De3Edee1F18E0157C05861564) where the price is low.
• Sub-step 2: Swap on DEX B: Immediately sell the purchased token on a different DEX, like Sushiswap (Router address: 0xd9e1cE17f2641f24aE83637ab66a2cca9C378B9F), where the price is higher.
• Sub-step 3: Calculate Profit: Ensure the final amount of the original borrowed asset is greater than the loan plus fees. The profit is the surplus that remains in your contract after full repayment.

Tip: Slippage tolerance and gas costs are critical. Set tight slippage limits in your swap functions and account for all gas used in the transaction when calculating minimum profitable arbitrage size.

solidityCopy
// Simplified arbitrage logic inside executeOperation
// 1. Swap borrowed DAI for WETH on Uniswap
uniswapRouter.swapExactTokensForTokens(
    borrowedAmount,
    minAmountOutUniswap,
    path_DAI_to_WETH,
    address(this),
    deadline
);
// 2. Swap WETH back for more DAI on Sushiswap
sushiswapRouter.swapExactTokensForTokens(
    wethBalance,
    minAmountOutSushiswap,
    path_WETH_to_DAI,
    address(this),
    deadline
);

Detailed Instructions

The transaction will fail if you do not repay the loan plus the fee by the end of the executeOperation function. This is the atomicity guarantee of flash loans. You must calculate the total amount owed, grant an allowance to the lending pool, and ensure the function returns true.

• Sub-step 1: Calculate Total Owed: Sum the principal borrowed and the protocol fee. For our 100,000 DAI example with a 0.09% fee, the fee is 90 DAI, making the total owed 100,090 DAI.
• Sub-step 2: Approve the Pool: Your contract must call approve on the borrowed token's contract, allowing the lending pool to withdraw the owed amount. The spender is the lending pool address.
• Sub-step 3: Return True and Keep Profit: After approval, the function must return true. Any remaining balance of the borrowed asset in your contract after the pool withdraws its due is your net profit.

Tip: Always verify the transaction on a block explorer like Etherscan. A successful flash loan transaction will show a single, complex transaction containing the loan, your swaps, and the repayment. If it fails, all state changes are reverted, and you only lose the gas fee.

solidityCopy
// Final steps inside executeOperation
uint256 premium = amounts[0] * 9 / 10000; // 0.09% fee calculation
uint256 amountOwing = amounts[0] + premium;

// Approve the LendingPool to pull the funds
IERC20(assets[0]).approve(address(LENDING_POOL), amountOwing);

// Any DAI balance in this contract above `amountOwing` is now profit.
return true;

Detailed Instructions

Before writing code, you must understand the core mechanism of a flash loan. A flash loan is an uncollateralized loan that must be borrowed and repaid within a single blockchain transaction. If the loan is not repaid by the end of the transaction, the entire transaction reverts, making the operation risk-free for the lender. This is enforced by the smart contract logic.

• Sub-step 1: Choose a Protocol: Select a DeFi platform that offers flash loans, such as Aave or dYdX. For this guide, we'll use Aave V3 on the Sepolia testnet.
• Sub-step 2: Set Up Environment: Initialize a Hardhat or Foundry project. Install necessary dependencies like @aave/core-v3 and dotenv for managing private keys.
• Sub-step 3: Get Test Tokens: Acquire testnet ETH and ERC-20 tokens (like USDC, DAI) from a Sepolia faucet to pay for gas and simulate trades.

Tip: Always use a testnet first. The immutable nature of blockchain means deployed contract bugs can lock funds permanently.

Detailed Instructions

The contract must implement the flash loan receiver interface specified by the lending protocol. For Aave, your contract must inherit from IFlashLoanSimpleReceiver or IFlashLoanReceiver and implement the executeOperation callback function. This function is called by the Aave pool after it sends you the loaned assets.

• Sub-step 1: Import Interfaces: In your Solidity file, import IPoolAddressesProvider and IFlashLoanSimpleReceiver from the Aave GitHub repository.
• Sub-step 2: Define Arbitrage Logic: Inside executeOperation, write the steps to exploit a price difference. For example, swap borrowed DAI for ETH on Uniswap V3, then swap that ETH back for more DAI on a different DEX like SushiSwap.
• Sub-step 3: Calculate Profit: Ensure your final DAI balance is greater than the loan amount plus a 0.09% flash loan fee (Aave's typical fee). The profit is the remainder after repayment.

solidityCopy
function executeOperation(
    address asset,
    uint256 amount,
    uint256 premium,
    address initiator,
    bytes calldata params
) external override returns (bool) {
    // 1. Your arbitrage logic here
    // 2. Approve the Pool to pull the owed amount
    uint256 amountOwed = amount + premium;
    IERC20(asset).approve(address(POOL), amountOwed);
    return true;
}

Detailed Instructions

Your contract's main function will call the lending pool to request the loan. You must specify the asset, amount, and callback parameters. The key is that all profit-generating actions (the arbitrage) happen within the executeOperation callback. You will use a DEX router like Uniswap's ISwapRouter to perform the trades.

• Sub-step 1: Request Loan: Create a function like startArbitrage that calls POOL.flashLoanSimple(address(this), asset, amount, params, 0). Use params to pass any needed data (like swap paths) to the callback.
• Sub-step 2: Execute Swaps: In executeOperation, use the borrowed assets. For example, call swapExactTokensForTokens on Uniswap's router contract at address 0xE592427A0AEce92De3Edee1F18E0157C05861564.
• Sub-step 3: Repay Loan: After swaps, calculate the total owed: loan amount + fee. The contract must approve the Aave pool to withdraw this sum. The callback must return true for success.

Tip: Simulate the entire transaction using a forked mainnet in Hardhat (hardhat node --fork https://eth-mainnet.g.alchemy.com/v2/YOUR_KEY) to test profitability with real prices before deploying.

Detailed Instructions

Thorough testing is critical. Write unit tests that simulate the entire arbitrage path, including edge cases like failed swaps or insufficient profit. After testing, you'll deploy and fund the contract.

• Sub-step 1: Write Comprehensive Tests: Use Hardhat or Foundry to test the contract on a forked network. Mock price differences by manipulating oracle data or using different DEX pools. Verify the contract reverts if profit is less than the flash loan fee.
• Sub-step 2: Deploy to Mainnet: Use a script with your deployer private key (securely stored in .env). Deploy to Ethereum mainnet or an L2 like Arbitrum. The contract address will be generated upon deployment.
• Sub-step 3: Fund and Trigger: Send a small amount of ETH (e.g., 0.1 ETH) to the deployed contract address to cover transaction gas costs. You or a keeper bot must then call the startArbitrage function, paying close attention to gas prices and network congestion which can erase profits.
• Sub-step 4: Monitor and Withdraw: Implement an ownerOnly function to withdraw accumulated profits (in ETH or tokens) from the contract to your wallet address (e.g., 0xYourAddress). Use a blockchain explorer like Etherscan to monitor transactions.