4 ms·

Wouldn't a lender charge money for what is essentially an option to borrow contingent on the arbitrage transaction going through?

ryebit 6y ago
Per other responses, they frequently do charge a special fee (I think Aave charged around 0.09% at one point but can't find good ref right now). One interesting thing I think is still under dev/consideration is adding the ability for MakerDAO to make "flash mint loans"(https://forum.makerdao.com/t/mip25-flash-mint-module/4400/9 https://forum.makerdao.com/t/mip25-flash-mint-module/4400/9) -- essentially a flash loan where the caller can mint an arbitrary amount of DAI without having to back it with anything, so long as they pay it back + fee at the end. There's a similiar idea being worked out for WETH10 (https://github.com/WETH10/WETH10#flash-loans https://github.com/WETH10/WETH10#flash-loans), a project trying to make a feature update of the WETH (wrapped ether) token. I'm honestly unsure WTH the impact of something like these would be, but would definitely prevent arbitrage from going too far out of bounds, since there would always be unlimited liquidity. Multi-party atomic financial transactions are kinda insane.
AaronFriel 6y ago
So someone else starts a lender to charge slightly less. The race to the bottom happens very quickly.
- the_local_host 6y ago
  I don't think it makes sense to handwave the cost of an option to borrow to 0 in a scenario where arbitrage is assumed to still exist. If anything is going to become perfectly efficient first it's the arbitrage ("free money!").
  - qqii 6y ago
    Feeless flash loans exist: https://money-legos.studydefi.com/#/dydx https://money-legos.studydefi.com/#/dydx Aave is 0.09%: https://aave.com/flash-loans/ https://aave.com/flash-loans/ It is also an important part of uniswap: https://uniswap.org/docs/v2/core-concepts/flash-swaps/ https://uniswap.org/docs/v2/core-concepts/flash-swaps/ Any fees on a flash loan will disincentive closing arbitrage positions to that fee amount.
    - the_local_host 6y ago
      This seems to good to be true. From https://money-legos.studydefi.com/#/dydx https://money-legos.studydefi.com/#/dydx : Borrow x amount of tokens. (Withdraw) Call a function (i.e. Logic to handle flashloaned funds). (Call) Deposit back x (+2 wei) amount of tokens. (Deposit) It looks like unlimited leverage for flat fee.
      - v64 6y ago
        This article [1] does a deep dive into how flash loan mechanics are structured using an actual Ethereum transaction as an example. This particular flash loan used dYdX, Uniswap, Aave, and Curve.fi. Because of the atomicity of the transaction, there's no way to default on the loan. If you can't pay it back, you're never loaned the money in the first place. [1] https://medium.com/@kentmakishima/the-43k-defi-magic-trick-flash-loans-smart-contracts-and-atomic-swaps-galore-b26b22bb0423 https://medium.com/@kentmakishima/the-43k-defi-magic-trick-f...
        monokh 6y ago
        What I struggle to understand is why the capital can be used with no fee (dydx - 2 wei). Why would someone contribute to such a pool that pays no interest as opposed to staking or lending somewhere else?
        theptip 6y ago
        In general the fee on a loan is based on two things: risk of default, and the time-value of money. It’s possible for the former to be zero, but lenders are losing money if they set the latter to zero. Basically if you put $1000 of capital into the pot for making flash loans, then you are foregoing the X% / year that you could earn on interest, i.e. you are losing money. It’s entirely possible that platforms are running these flash loans as a loss leader to drive adoption, but in a mature market and at scale, you’d expect there to be a small fee. (Or just that the success-case fee covers the loss in the failure case, but that would break if the % of failed txns increased, so might not be a stable equilibrium. )
deleted 6y ago
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ryebit 6y ago

Per other responses, they frequently do charge a special fee (I think Aave charged around 0.09% at one point but can't find good ref right now). One interesting thing I think is still under dev/consideration is adding the ability for MakerDAO to make "flash mint loans"(https://forum.makerdao.com/t/mip25-flash-mint-module/4400/9 https://forum.makerdao.com/t/mip25-flash-mint-module/4400/9) -- essentially a flash loan where the caller can mint an arbitrary amount of DAI without having to back it with anything, so long as they pay it back + fee at the end. There's a similiar idea being worked out for WETH10 (https://github.com/WETH10/WETH10#flash-loans https://github.com/WETH10/WETH10#flash-loans), a project trying to make a feature update of the WETH (wrapped ether) token. I'm honestly unsure WTH the impact of something like these would be, but would definitely prevent arbitrage from going too far out of bounds, since there would always be unlimited liquidity. Multi-party atomic financial transactions are kinda insane.

AaronFriel 6y ago

So someone else starts a lender to charge slightly less. The race to the bottom happens very quickly.

the_local_host 6y ago
I don't think it makes sense to handwave the cost of an option to borrow to 0 in a scenario where arbitrage is assumed to still exist. If anything is going to become perfectly efficient first it's the arbitrage ("free money!").
- qqii 6y ago
  Feeless flash loans exist: https://money-legos.studydefi.com/#/dydx https://money-legos.studydefi.com/#/dydx Aave is 0.09%: https://aave.com/flash-loans/ https://aave.com/flash-loans/ It is also an important part of uniswap: https://uniswap.org/docs/v2/core-concepts/flash-swaps/ https://uniswap.org/docs/v2/core-concepts/flash-swaps/ Any fees on a flash loan will disincentive closing arbitrage positions to that fee amount.
  - the_local_host 6y ago
    This seems to good to be true. From https://money-legos.studydefi.com/#/dydx https://money-legos.studydefi.com/#/dydx : Borrow x amount of tokens. (Withdraw) Call a function (i.e. Logic to handle flashloaned funds). (Call) Deposit back x (+2 wei) amount of tokens. (Deposit) It looks like unlimited leverage for flat fee.
    - v64 6y ago
      This article [1] does a deep dive into how flash loan mechanics are structured using an actual Ethereum transaction as an example. This particular flash loan used dYdX, Uniswap, Aave, and Curve.fi. Because of the atomicity of the transaction, there's no way to default on the loan. If you can't pay it back, you're never loaned the money in the first place. [1] https://medium.com/@kentmakishima/the-43k-defi-magic-trick-flash-loans-smart-contracts-and-atomic-swaps-galore-b26b22bb0423 https://medium.com/@kentmakishima/the-43k-defi-magic-trick-f...
      - monokh 6y ago
        What I struggle to understand is why the capital can be used with no fee (dydx - 2 wei). Why would someone contribute to such a pool that pays no interest as opposed to staking or lending somewhere else?
      - theptip 6y ago
        In general the fee on a loan is based on two things: risk of default, and the time-value of money. It’s possible for the former to be zero, but lenders are losing money if they set the latter to zero. Basically if you put $1000 of capital into the pot for making flash loans, then you are foregoing the X% / year that you could earn on interest, i.e. you are losing money. It’s entirely possible that platforms are running these flash loans as a loss leader to drive adoption, but in a mature market and at scale, you’d expect there to be a small fee. (Or just that the success-case fee covers the loss in the failure case, but that would break if the % of failed txns increased, so might not be a stable equilibrium. )

deleted 6y ago

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