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Borrow Millions In DEFI With NO COLLATERAL? FLASH LOANS Explained (Aave, dYdX) - YouTube
Channel: Finematics
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so what are flash loans all about and how can聽
they be used to borrow millions of dollars worth聽聽
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of crypto with no collateral you'll find answers聽
to these questions in this video before we begin聽聽
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if you want to learn more about decentralized聽
finance make sure you subscribe to my channel聽聽
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a flash loan is a feature that allows you聽
to borrow any available amount of assets聽聽
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from a designated smart contract pool with聽
no collateral flash loans are useful building聽聽
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blocks in d5 as they can be used for things like聽
arbitrage swapping collateral and self-liquidation聽聽
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flash loans although initially introduced by the聽
marble protocol were popularized by ave and dydx聽聽
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so what's the catch a flash loan has to be聽
borrowed and repaid within the same blockchain聽聽
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transaction the concept of a transaction on聽
a blockchain such as ethereum is no different聽聽
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to the traditional definition of聽
a transaction in computer science聽聽
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a transaction represents a set of operations聽
that must be executed in an atomic way聽聽
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either all the steps are executed聽
or the transaction is rolled back聽聽
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and none of the steps take place let's take聽
a simple database transaction as an example聽聽
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if you're already familiar with this concept feel聽
free to skip this part imagine a database table聽聽
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that represents user's balances alice's balance is聽
1 000 and bob's balance is 500 ali sends bob 500聽聽
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dollars in this case we of course have to subtract聽
500 from alice's balance and add 500 dollars聽聽
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to bob's balance so we start writing our聽
database update statements the first update聽聽
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statement subtracts 500 from alice's balance the聽
second statement adds 500 dollars to bob's balance聽聽
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this is cool but what happens if the first update聽
executes but the second one fails for some reason聽聽
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maybe id2 is not present in the system and聽
we made a mistake thinking it's bob's id聽聽
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if this happens we would end up in an inconsistent聽
state with alice's balance equal to 500 dollars聽聽
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and bob's balance also equal to 500 dollars聽
to avoid situations like this we have to use聽聽
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transactions in the above situation in sql we just聽
need to wrap both statements with begin and commit聽聽
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keywords once we do that we can safely assume聽
that either both statements are executed correctly聽聽
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or none of them are leaving alice's and聽
bob's balances untouched we often say聽聽
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that if different steps are a part of the same聽
transaction they are atomic hence indivisible聽聽
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all or nothing when it comes to ethereum聽
every common operation such as sending it聽聽
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sending erc20 tokens and interacting with smart聽
contracts are executed within a transaction scope聽聽
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transactions are grouped together and included聽
in ethereum blocks we can easily see all the聽聽
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transactions that were included in a particular聽
block on any popular block explorers such as聽聽
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etherscan one ethereum transaction can聽
consist of multiple steps for example聽聽
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you could supply heath and borrow dye on compound聽
swap half of you borrow die for usdc on curve and聽聽
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provide liquidity to die usdc pool on uniswap聽
all in one single ethereum transaction of course聽聽
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if any of these steps result in an error the whole聽
transaction will be rolled back and none of the聽聽
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steps will take place remember you will still pay聽
gas fees even for failed contract executions the聽聽
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number of steps in a single transaction is only聽
bounded by the gas cost so although in theory you聽聽
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could create a valid transaction with thousands聽
of steps realistically it would be rejected聽聽
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because of the max gas cost limit per block now聽
let's dive a little bit deeper into flash loans聽聽
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first of all the most important part of聽
executing a flash loan is to find a flash聽聽
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loan provider projects such as other or dydx聽
developed smart contracts that allow defy users聽聽
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to borrow different coins from a designated pool聽
under the condition that they are repaid within聽聽
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the same ethereum transaction there is usually聽
a fixed cost associated with using flash loans聽聽
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other contracts for example require the borrower聽
to return the initial amount plus an extra聽聽
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0.09 percent of the borrowed amount the fee is聽
split between depositors who provide the funds聽聽
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that can be borrowed and integrators who聽
facilitate the use of aves flash loan api聽聽
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a part of this fee is also swapped to other聽
tokens and burned once the amount is borrowed聽聽
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from the landing pool it can be used for any聽
other arbitrary actions assuming that at the聽聽
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end of the chain of different steps the initial聽
flash loan is repaid because the loan has to be聽聽
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repaid within one transaction there is no risk聽
of borrowers not repaying their borrowed amount聽聽
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the only risk is the always present smart contract聽
and platform risk flash loans are becoming聽聽
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more and more popular with some of the users聽
borrowing as high as 14 million die on the other聽聽
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there are three most common use cases for flash聽
loans arbitrage flash loans can magnify the profit聽聽
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of executing a successful arbitrage opportunity聽
let's imagine that there is a price discrepancy聽聽
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in the die usdc pulls between uni swap and curve聽
you can trade one dive for one usdc on curve but聽聽
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you only need 0.99 die to buy one usdc on uni swap聽
now you can try to execute the following arbitrage聽聽
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borrow 100 000 die from ava via flash loan swap聽
100 000 die for usdc on uni swap and receive 100聽聽
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and 1010 usdc swap 100 and 1000 ten usdc for聽
one hundred one thousand and ten die on curve聽聽
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repay initial one hundred thousand die plus zero聽
point zero nine percent fee equals *100 090 profit聽聽
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*920 die this looks nice but we have to聽
take a few extra things into consideration聽聽
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network fees arbitrage transactions with聽
multiple steps can be quite expensive聽聽
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always take transaction fees into聽
account when calculating your profits聽聽
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price slippage always calculate how much price聽
slippage you'll experience while executing your聽聽
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order a hint it depends on the size of your order聽
and the liquidity present in the liquidity pool聽聽
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front running there is a high chance that someone聽
else will spot the same opportunity and will聽聽
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manage to get their transaction mind ahead of聽
you on top of that bots that monitor the mempool聽聽
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can pick up your profitable arbitrage opportunity聽
and send the same transaction with a higher gas聽聽
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fee profiting them instead of you聽
basically stealing your arp opportunity聽聽
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the next use case for flash loans is a collateral聽
swap let's say you have borrowed dye from compound聽聽
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with it as collateral you can swap your collateral聽
from eath too for example but in the following way聽聽
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take a flashlight in dye to cover聽
the amount of dye that was borrowed聽聽
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repay your compound loan with borrowed聽
dye withdraw your eat swap your eat聽聽
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for bad on uni-swap supplied bath as collateral聽
on compound borrow die against your bad collateral聽聽
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repay flash loan with borrowed die plus fees聽
congrats you just swapped your collateral from聽聽
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heath to bat and paid 0.09 percent of the borrowed聽
amount for this the last but not least example is聽聽
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self-liquidation imagine the following scenario聽
you have a loan in die on compound with east as聽聽
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collateral the east price keeps going down and聽
you're approaching the liquidation level you also聽聽
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don't have to or don't want to deposit more ease聽
to increase your liquidation level and you also聽聽
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don't have the die required to repay the loan聽
now instead of allowing the maker dollar contract聽聽
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to liquidate your collateral and charge you the聽
liquidation fee you can take the following steps聽聽
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take a flash loan for the amount of diet that聽
you owe repay your die loan and withdraw your聽聽
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eat swap enough heat to die in order to repay the聽
flash loan plus fees keep the rest of your eath聽聽
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these were the three most common use cases聽
for flash loans of course the concept of聽聽
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flash loans is quite new and there are still a聽
lot of use cases to be discovered in the future聽聽
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flash loans similarly to crypto can be used for聽
both good and bad when it comes to the latter聽聽
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flash loans were used in most of the recent聽
defy hacks and allowed hackers to magnify聽聽
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their potential profits as they do not require any聽
upfront funds one of the most famous hacks was the聽聽
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bcx hack where a flash loan was used to manipulate聽
the uni swap oracle price as usual the problem聽聽
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was not in the use of flash loans but rather in聽
some incorrect assumptions when it comes to using聽聽
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uniswop as a price oracle events like this are聽
sometimes costly for the people affected by them聽聽
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but they are usually result in the strengthening聽
of the whole defy ecosystem making it more and聽聽
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more antifragile in the future although flash聽
loans are predominantly used by developers聽聽
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it is also possible to use them without doing聽
any coding projects such as collateral swap聽聽
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defy saver fury combo make it possible in聽
the description box below i have included聽聽
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links to our guides on how to code a flash loan聽
with ava and how to use fury combo so no matter聽聽
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if you're familiar with coding or not聽
you can find something that works for you聽聽
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so what do you think about flash loans have you聽
ever used them and do you think they are good聽聽
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for the defy ecosystem comment down below and聽
as always if you enjoyed this video smash the聽聽
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like button subscribe to my channel and check out聽
cinematics on patreon to join our defy community
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