Overview
This lecture explains how to build an arbitrage-based crypto trading bot using flash loans on decentralized exchanges (DEXs), covering the required steps, tools, and technologies.
Introduction to Arbitrage Trading Bots
- Arbitrage is buying cryptocurrency on one exchange and selling it on another for profit.
- Decentralized exchanges (DEXs) like Uniswap and PancakeSwap are preferred over centralized exchanges.
- Flash loans allow you to trade without upfront capital, as long as the loan is repaid within one transaction.
- Smart contracts prevent you from losing borrowed funds in these trades.
Step 1: Choosing a Blockchain
- The chosen blockchain must have many tokens, support multiple exchanges, and allow flash loans.
- EVM (Ethereum Virtual Machine) compatibility makes code portable across blockchains (e.g., Ethereum, Binance Smart Chain, Arbitrum).
Step 2: Selecting DEXs for Arbitrage
- Select two DEXs with similar code interfaces and high liquidity (e.g., Uniswap v3, PancakeSwap).
- Many DEXs are forks of well-known protocols, allowing similar trading strategies.
- Monitor all trade events on DEXs to spot price discrepancies for arbitrage opportunities.
Step 3: Picking Token Pairs
- Research popular tokens, ideally top tokens listed on Etherscan or found via DEX explorers (DEX Screener, DEXTools).
- Ensure tokens are ERC20 standard compatible and available with high trading volume on multiple exchanges.
- Use wrapped versions for native assets like ETH (WETH) or BTC (WBTC) for trading.
Step 4: Choosing a Flash Loan Provider
- Flash loans provide large, no-collateral loans to be repaid in one transaction.
- Balancer is suggested for its easy setup, no fees, and multi-chain support.
- Implement flash loan functions in your smart contract to receive and utilize funds for arbitrage.
Step 5: Writing the Arbitrage Smart Contract
- Create a smart contract that executes trades on both DEXs using flash loans.
- Import and interface with DEX contracts (e.g., Uniswap v3's swap functions).
- Specify trade parameters: tokens, recipient, deadline, and amount.
Step 6: Building the Searcher Bot
- Smart contracts only act when called; an off-chain bot is needed to monitor and trigger trades.
- Build the bot in Node.js using the ethers.js library to listen for swap events and detect arbitrage opportunities.
- The bot performs calculations, checks for profitability after gas fees, and calls the smart contract for execution.
Key Terms & Definitions
- Arbitrage — Profiting from price differences of the same asset across markets.
- DEX (Decentralized Exchange) — Blockchain-based platform for crypto trading without intermediaries.
- Flash Loan — Instant, no-collateral loan that must be repaid within one transaction.
- Smart Contract — Self-executing blockchain code that enforces rules and transactions.
- ERC20 — Standard for fungible tokens on Ethereum.
- Wrapped Tokens (e.g., WETH, WBTC) — Tokens representing another cryptocurrency, compliant with ERC20.
Action Items / Next Steps
- Research EVM-compatible blockchains and select suitable DEXs.
- Identify high-liquidity ERC20 token pairs for arbitrage.
- Study Balancer’s flash loan documentation.
- Learn to write and deploy smart contracts for DEX trading.
- Develop an off-chain monitoring bot in Node.js with ethers.js.