Make Money with Crypto Flash Loans: Controversial Strategies?

There are essentially four primary strategies to make money with crypto flash loans – arbitrage trading, yield farming, just-in-time liquidity, and liquidating delinquent loans.

If you’re new to DeFi, you might have heard about flash loans and wondered if they could be a way to make money. Crypto flash loans are a game changer for the crypto space, as it lets people tap into large amounts of crypto quickly, making it easier for anyone, anywhere, to be part of complex financial transactions that were once out of reach.

In this article, we’ll walk you through how flash loans work and the strategies people use to make money with them, presenting a realistic view of the opportunities and challenges in this space. 

What are Crypto Flash Loans?

Flash loans are a unique decentralized finance (DeFi) tool. They allow users to borrow large sums of cryptocurrency without collateral – a significant departure from traditional loan provisions. This is possible using smart contracts introduced by the Ethereum network. 

What are smart contracts? They are self-executing contracts with the terms of the agreement directly written into lines of code stored on a blockchain. These contracts execute the entire flash loan process within one blockchain transaction. If any part of the plan fails, the smart contract automatically undoes the transaction as if it never happened.

You can access flash loans on several platforms in the DeFi ecosystem, including Equalizer, Aave, Uniswap, DyDx, and MakerDAO. Each of these has its own set of benefits and limitations, depending on what you plan to do with them. As we dive into different ways to make money with crypto flash loans, we’ll also highlight the platforms best suited for each strategy.  

Check out our in-depth guide on flash loans to learn more.

2 Strategies to Make Money with Flash Loans

2 Strategies to Make Money with Flash Loans

1. Arbitrage Trading using Flash Loans

Imagine finding a crypto coin cheaper on one exchange and selling it for a higher price on another – that’s the core of arbitrage trading. Flash loans add an exciting twist to this. They let traders borrow large amounts of crypto without any upfront collateral, allowing users to maximize profits from even slight price differences. 

All this sounds good on paper. But in reality, people with development skills and past trading experience are typically the ones making the most money with this strategy. Why? To effectively execute this strategy, you need to develop a bot and code a smart contract. The bot’s job is to constantly search various DEXs for price differences. The bot will then trigger the smart contract, which is coded to automatically initiate a flash loan and complete the arbitrage trade in a quick, single transaction. 

This automation ensures that as soon as a profitable opportunity is detected, the bot can immediately capitalize on it using the flash loan and then complete the trade within the same transaction block. 

Step-by-Step Instructions

Here is a high-level step-by-step guide of how to make money with crypto flash loans using arbitrage trading bots:

1. Choose Your Blockchain: Start by choosing a blockchain that supports various cryptocurrencies and flash loans. Popular choices include Ethereum, Tron, and Binance Smart Chain.

2. Select Two DEXs: Choose two decentralized exchanges (like Uniswap and SushiSwap) for arbitrage. You can use tools like DeFi Llama to help you decide.

3. Watch for Trading Opportunities: Keep an eye on swap events on these DEXs to spot price differences, signaling arbitrage opportunities.

4. Pick Your Tokens: Decide on two kinds of tokens – one to borrow with your flash loan and another for making your trades. ERC20 tokens are a common pick.

5. Find a Flash Loan Provider: A popular choice is Balancer, known for its no fees and user-friendly interface. Their guides will help you integrate flash loans into your setup.

6. Set Up Token Trading: Learn about swapping tokens for your trades. For instance, if you’re using Uniswap for your arbitrage trades, they offer specific documentation to learn about this stuff. 

7. Create a Monitoring Bot: Build a bot that constantly checks the market for these price differences and triggers your smart contract when it sees one. You can use programming tools like Node.js and Ether.js.

8. Run Your Bot: Finally, get your bot up and running on either your own computer or a cloud server. This way, it can work all day and night, catching every chance to trade.

2. Yield Farming with Flash Loans

Yield farming is a clever way to make money with crypto flash loans, and it’s pretty straightforward. Here’s how it works: You start with a small amount of cryptocurrency and get a helping hand from a flash loan to increase your investment. This larger deposit results in a proportionally higher yield. You then use the same DeFi platform to borrow funds to repay the flash loan, all within the same transaction. 

Yield farming with flash loans works due to the difference between the cost of the loan and the return on the increased deposit. Although there’s a fee for the flash loan, the larger deposit in the yield farming application means you earn more than enough to cover this fee and still profit. However, note that there is always a liquidation risk when you take out a collateralized crypto loan. 

Check out our in-depth guide on yield farming to learn more.

Step-by-Step Instructions

1. Initial Deposit: Begin by depositing a small amount of cryptocurrencies into a yield farming application, like Compound Finance. For instance, you might deposit $30 in USDC.

2. Obtain a Flash Loan: Next, take out a flash loan for a larger amount. Using our example, you could borrow an additional $70 in USDC.

3. Combine Funds and Deposit: Merge your personal funds with the borrowed amount. In our case, you now have $100 in USDC to deposit into the yield farming application.

4. Repay the Flash Loan: This step is crucial. You must reborrow a portion of your deposit to repay the flash loan. All of this happens in the same transaction using smart contract capabilities. 

5. Enjoy Increased Exposure: Now, with your new, bigger deposit, you can start earning higher returns. This can include the usual yield on your deposit plus any additional tokens or rewards the yield farming platform might offer. 

2 Controversial Strategies to Make Money with Flash Loans

2 Controversial Strategies to Make Money with Flash Loans

1. Just in Time Liquidity

Just in Time Liquidity is a new, clever strategy that capitalizes on the unique concept of Maximal Extractable Value (MEV) in the DeFi space. Maximal Extractable Value (MEV) refers to the maximum value traders can extract in blockchain transactions beyond the usual rewards by manipulating the order of transactions in a block. 

Here’s how it works: traders, also known as MEV (Maximal Extractable Value) searchers, use flash loans to borrow cryptocurrencies. They then use this to add liquidity to a DeFi pool right before a big trade happens. This timing lets them earn trading fees received as rewards for providing liquidity. 

For example, a searcher might spot a pending large swap on Uniswap and quickly add liquidity to the relevant pool using borrowed funds from a flash loan. After earning the trading fees, they withdraw their liquidity and repay the flash loan, all within the same block. This strategy has become more effective with concentrated liquidity in platforms like Uniswap v3, where liquidity providers can find pools with specific price ranges.

While this strategy can be profitable, it’s not without its problems. Firstly, it exposes MEV searchers to risks, like sudden price drops (delta risk), which could reduce their profits. Secondly, this approach has raised concerns within the DeFi community, as it can benefit a few savvy traders at the expense of regular DeFi users. 

How? Strategies like Just in Time Liquidity can lead to issues seen in traditional finance, such as front-running (where traders jump ahead in line unfairly) and order flow selling (selling trading activity date for profit). This can make passive liquidity provision more challenging and trading on DEXs less attractive for average users.

2. Liquidating Delinquent Loans

Other than flash loans, many also borrow overcollateralized crypto loans –  borrowers depositing more cryptocurrency as collateral than the loan’s value. They might do this to leverage their trading position or use their crypto without triggering taxable events. But there’s a catch: if the value of the collateral drops significantly, the loan faces liquidation.

Many lending platforms, like Aave, incentivize users to help close out these delinquent loans. Enter flash loans. Anyone can access crypto funds using flash loans to close these loans and receive rewards. While this helps keep the system stable and is part of the agreed loan terms, it can be tough for the person whose loan gets liquidated, as they lose money. 

Moreover, to use this strategy effectively, you need skills in writing intricate code to identify these overdue loans. Then, you must create smart contracts that utilize flash loans to settle these loans. So, if you have little to no coding experience, this may not be a suitable strategy for you to make money with crypto flash loans. 

Can you Really Make Money with Crypto Flash Loans?

Making money with flash loans in the DeFi world is a bit like a high-tech treasure hunt – possible but quite challenging. The competition is fierce, with big players using advanced bots and algorithms to snatch up profitable opportunities, leaving smaller players with slim margins. Continuously monitoring the mempool (a database of pending transactions), being good at predicting market moves, and top-notch coding skills are just the bare minimum. 

The risks are also high. Different strategies, like yield farming or loan liquidations, come with their own risks, such as market swings or timing issues. Plus, there’s always the risk that a small glitch in a smart contract could lead to big losses.

In conclusion, while you can make money with crypto flash loans, it’s not easy. You’re up against tough competition with extensive resources that are constantly evolving, making it hard to keep up and stay profitable.