What is Lightning Loan? How to use it to arbitrage $ 360,000 in 13 seconds?

Someone who is smart and sly has just obtained a $ 350,000 book "benefit" by manipulating the DeFi loan agreement bZx, but the bZx team has restricted the operator's withdrawal through the admin key, making it impossible to make a real profit. This incident caused a great uproar in the DeFi world, and also made the new species "Flash Loan" a hot topic. To put it simply, a manipulator borrowed 10,000 ETH from the decentralized digital currency derivative trading platform dYdX through “Flash Loan”, and used 5500 ETH to loan 112 WBTC at Compound, and used 1300 ETH to A 5x ETH short order was opened on bZx (that is, 5637 ETH was used to exchange WBTC). Due to the limited exchangeable WBTC in the Uniswap pool, in order to continue this exchange operation, the WBTC price was raised, and at the same time, the operator Then sold 112 WBTC borrowed from Compound to get about 6800 ETH, and then returned the originally borrowed 10,000 ETH (6800 + 3200, Note: 3200 = 4500-1300). In the process, the profit was equivalent to 360,000 USD in ETH.

And all of this is done in one block.

What is "Flash Loan"

Lightning loan is a new term for DeFi ecology. We know that DeFi has many advantages, but it also has structural defects. DeFi requires excess pledge, which means that the utilization rate of funds is very low. The "lightning loan" allows borrowers to borrow without collateralizing assets, thereby greatly improving capital utilization.

Lightning loan is the completion of borrowing and repayment in a chain transaction without collateral. Because an on-chain transaction can include multiple operations, developers can add other on-chain operations between borrowing and repayment, making such borrowing a lot more imagination and also meaningful.

The Aave protocol also provides the function of Lightning Loan. According to its official introduction, the function of Lightning Loan is to ensure that users do not need to mortgage to realize repayment, that is, if the funds are not returned, the transaction will be restored, that is, all operations previously performed are cancelled, thereby Ensure the security of agreements and funds.

However, the Lightning Loan of the Aave agreement is mainly targeted at developers who build financial products, and directly serves the developer community, so that more developers can use Lightning Loan to create refinancing tools or arbitrage tools to build financial products without funds. Thereby lowering the development threshold. But in the end, the ultimate beneficiaries of these financial products are end users.

Of course, you can also perform similar operations yourself based on the idea of ​​Lightning Loan. The premise is that you need to spend several weeks learning Solidity and how to code.

Other applications of Lightning Loan

CDP (Valut) clearing application

Developers can build a CDP clearing application based on Lightning Loan. When the Maker system requires additional collateral deposit, this app will use Lightning Loan to automatically withdraw and repay loans in other lending agreements before liquidation occurs, thereby avoiding paying up to 13% of the settlement fee, even if 1% of the payment is required. Developers can also reduce losses by 12%.

Reduce Uniswap transaction fees

The founder of DForce mentioned that with the help of Flash Loan, the transaction fee of Uniswap can be reduced from 0.3% to 0.05%, and the following operations can be completed in one transaction:

  1. Use 2500w USD to borrow ETH from the lending platform
  2. 1500w USD ETH in MakerDAO to lend 1000w DAI
  3. Use this 1000w DAI to Uniswap to provide liquidity to DAI
  4. Perform any DAI related transactions you want in Uniswap
  5. Repayment of the first ETH loan

In this way, you only need to pay a fee of 0.05% instead of 0.3% for the transaction in the fourth step (because you provide DAI liquidity and get 82% commission rebate).

At last

We have also seen many different views on such a new thing:

  • Aave Founder: Lightning Loan can expand more DeFi use cases and diversify DeFi product types, because it greatly reduces the need for funds and also reduces transaction costs.
  • Professor AVA Labs CEO Gun: Returning ETH in the same transaction can be borrowed without any collateral. Flash Loan's idea goes beyond what Wall Street can do. It seems that all this can only be done by smart contracts on the chain.
  • It has also been said that Lightning Loan is a nuclear bomb for DeFi, and the switch is placed on the square. Its degree of danger is analogous to PoS, which is equivalent to anyone's interest in borrowing the entire network for 51% attacks.

We don't know where Flash Loan will eventually go, but in it, we have at least seen the infinite possibilities of DeFi application scenarios and the active innovation of DeFi ecological developers.

Reference article:

  • LeftOfCenter-The chain news loan agreement bZx was manipulated to make "Lightning Loans" popular, and read the secret of the Lightning Loans that must be repaid in 13 seconds https://www.chainnews.com/articles/310002254120.htm
  • Flash Loan-The crazy new invention of DeFi https://v2eth.com/s/kcpkvz/flash_loan_defi
  • Peckshield analysis https://medium.com/@peckshield/bzx-hack-analysis-exposes-challenging-defi-inherent-composable-liquidity-risks-e3e1c623b7bd
  • DeFi Low-key Share | How to empty gloves White Wolf 51 BTC https://mp.weixin.qq.com/s/xp75HEhc0dVYonxz3smL9A