Cryptocurrency trading at times requires borrowing money to invest and make more profit. Rather than going to the bank to borrow money, you can obtain a flash loan, a perk that Decentralised Finance(DeFi) offers.
The concept of flash loans became popular in 2020 through Aave and since then, it has been in use. Flash loans can be defined as uncollateralized lending that occurs on DeFi, and it is mostly based on the Ethereum network. It is uncollateralized because no asset or property is pledged to ensure repayment. It is encoded in a smart contract or a digital agreement, which ensures that the borrower repays the money before the duration of that particular transaction expires.
The use of flash loans is one way to make more profits from crypto trading without risking your money and as a result, you could make a fortune from crypto if only you understand how it works. Many crypto blogs have explained how it works, and in this article, we will be looking at some of the ways to profit from crypto using flash loans. These techniques include:
Use Of Flash Loans For Arbitrage Trading
This is one of the commonest ways to gather green leaves from crypto trading. Arbitrage trading involves one buying an asset or a coin on one exchange and selling it on another exchange. This is to say that you are buying at a lower price and selling at a higher price, and as a result, you can take advantage of the price differences to generate more profit.
The use of flash loans in arbitrage trading centres on one’s ability to key out the discrepancies in the prices of an asset. Because you’ve been able to do this, you can immediately make smart contracts, buy the asset, sell on another platform and make your profit immediately without even risking your own money.
This is another best way to secure lots of profit through flash loans. Imagine a scenario where you took out a loan or bought an asset from an exchange platform only to realise that another platform does the same but with a higher interest rate.
This is where the use of flash loans comes in. With flash loans, you can buy that asset on the platform while simultaneously paying back the other loan you got and in the end, you have been able to pay back the loan, acquire the asset, and make a profit from it immediately, all with flash loans.
This involves rapid swapping of the borrower’s collateral to make the loan with another one. With flash loans, you can do this and still make tons of profit.
Reduced Transaction Fee
This is another advantage of using flash loans. The transaction fees are significantly reduced. DeFi lenders like Aave, charge only a transaction fee of 0.09%, and in most cases, they deduct the fees only when a profit is made. Likewise, if profit were not made, they would not do that. Hence, you are not losing.
Flash loans are smart contracts, unsecured and instant. This means you can make your profit within a very short period, approximately 13 seconds. Therefore, you can make substantial gains with flash loans without putting your money at risk.