Flash loans are an innovative feature in decentralized finance (DeFi) that allows users to borrow large amounts of cryptocurrency without needing collateral, as long as the borrowed amount is returned within the same transaction block. This makes them highly useful in arbitrage trading, where traders capitalize on price discrepancies between exchanges or liquidity pools.
In arbitrage trading, speed is crucial, and flash loans provide a way to borrow assets instantly to exploit these opportunities without requiring upfront capital. When using a flash loan, the arbitrage trading bot can borrow funds from a DeFi platform like Aave or dYdX, then immediately execute trades across different platforms, buying low on one exchange and selling high on another.
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