What is a Flash Loan Arbitrage Bot and how does it work in DeFi trading?

A flash loan is an uncollateralized loan provided using DeFi protocols such as Aave or DyDx. It enables users to borrow huge amounts of cryptocurrency immediately; but, the full transaction (borrow, use, and refund) must take place within a single blockchain transaction. If the loan is not repaid immediately, the entire transaction fails.

How the Flash Loan Arbitrage Bot Work

1. Price Scan: The bot continually checks prices across several DEXs (including Uniswap, SushiSwap, and Balancer).

2. Identifying opportunities: Flash loan bot recognises when an asset’s price falls on one exchange and rises on another.

3. Flash Loan Execution: The bot obtains funds (such as ETH) using a flash loan.

4. Buy low and sell high:

• Purchases the underpriced token on DEX A.
• Sells it for a greater price on DEX B.

5.Loan repayment: In a single transaction, the profit is used to pay back the flash loan.

6. Profit Capture: If completed successfully, the bot retains the price difference as pure profit.