Flash loans have emerged as a useful way to set up efficient arbitrage transactions for cryptocurrency traders interested in exploiting opportunities between different crypto platforms. Until recently, setting them up required a considerable amount of technical knowledge.
Technical platform Flashloans.com was launched as a much easier cryptocurrency interface for traders, leveraging drag-and-drop technology to help them use flash loans as leverage on arbitrage trades.
What are flash loans and why use them?
Part of the appeal of flash loans is that the blockchain technology allows the lender to verify the trade and collateral on a nut soup basis, allowing the loan to be approved instantly. Typical duration is 15 seconds. Traders invest Ethereum but only receive 80% of the value of the crypto, so this is not a 1:1 deal, but rather 0.8:1. Barriers to entry are low and there remains ample liquidity in the market to allow for substantial transactions by institutions. The market is still a niche market currently, with solidity developers making up a large portion of the volume.
One of the new areas of opportunity for flash lending has been for bitcoin lenders looking to exit lending platforms before costly margin calls wipe out their positions. This is an ongoing issue due to the falling price of BTC. To uncover the full extent of the problem, Flashloans compared the number of margin calls an investor with staked Bitcoins would face since the market peaked in November at $67,566.
The liquidation point (20% below this peak) was at $54,052, which took place on December 3, 2021. If you had then borrowed at that time, the next 20% drop at which you would have faced would have been in January 2022, when it went to $43,242. Investors should have faced another 20% drop in May 2022 when it hit $34,593, followed by another to $27,675 on June 12 and another margin call on June 18 when it hit an all-time low of $22,140.
In total, if an investor had staked funds in Bitcoin on a lending platform when the market peaked in November last year, they would have faced five margin calls. Many investors have been facing punitive margin calls since November 2021 (up to 14% for some platforms) and in some cases cannot even withdraw their impaired assets.
Use Flashloans to liquidate staked loans
Flashloans allows crypto lenders to take out a loan to exit lending positions at market rate and avoid punitive charges during reverse charge. Traders in crypto markets using the platform do not need any solid programming knowledge and only need to pay gas fees for the Ethereum network for the transactions they make.
David Pédrini at Flashloans told us that the platform is also working on a new feature that would help traders identify arbitrage opportunities in the market which they could then back with a flash loan. The timescale on this is estimated to be the next three months. “If you found an opportunity, then you could build a loan based on that trade,” he said.
Pedrini also reported that due to high fees on ETH killing the prospect of smaller arb opportunities, the site is also considering integrating Polygon. At present, the flash loan market remains very small, but market volatility is expected to continue to create trading opportunities. “We don’t see this opportunity going away anytime soon,” Pedrini said.