What Is a Flash Loan in dYdX?

dYdX is a DeFi borrowing and lending platform built on the Ethereum blockchain. It provides borrowing, lending, and betting features to cryptocurrency users. Superficially, dYdX resembles other DeFi lending protocols, but if you dig deeper, you will find a platform trying to take DeFi to the next level.

Though DeFi loans are offered by several platforms, like MakerDAO and Aave, dYdX is on a mission of building more advanced financial tools like flash loans. The dYdX protocol is accessible to anyone, and users’ digital assets are controlled by smart contracts instead of humans.

Understanding Flash Loans in dYdX

A flash loan is a financial tool that enables users to borrow any amount of digital assets from a certain protocol pool with no collateral or proof of income. Flash loans are integral DeFi building blocks, applicable in arbitrage, swapping collateral, and self-liquidation activities. While the Marble platform initially introduced flash loans, they were popularized by dYdX.

In dYdX flash loans, assets are borrowed and repaid in seconds under one transaction. The SoloMargin protocol defines the terms and conditions and executes instant trades on behalf of a borrower using the borrowed funds. Unlike other lending platforms, dYdX does not charge any fee – borrowers are only required to return the borrowed funds plus 2 Wei.

You will only be required to create a Solidity contract to call the “Operate” function on the SoloMargin protocol with these actions: withdraw, call, and deposit. Withdraws must borrow two tokens under one transaction: ETH and DAI.

Are Flash Loans Profitable?

Flash loans can help you make profits without risking your assets. This is how you can profit from flash loans:

Arbitrage Opportunities

You can use a flash loan to make a profit by identifying price differences across two exchanges and making maximum use of time. For example, if the price of BTC differs on two exchanges, you can leverage a flash loan and a separate smart contract to buy BTC from one exchange at $41,000 and sell them on the other exchange for $40,800 making a profit of $800. You then repay the loan plus 2 Wei and keep the $800.

Collateral Swaps

Here, you use one collateral to replace another collateral you used to get a loan swiftly.

Minimizing Transaction Fees

The gas fee is minimized since a flash loan condenses multiple transactions into a single transaction. The transaction cost is then levied on the loan amount; hence, the borrower incurs minimal charges.