Using the aforementioned strategy, you would buy a token on exchange X and sell it on exchange Y, making yourself a profit of $1. This may not seem like much, but what if you were to try investing $100,000 instead? Then you could profit $10,000 in a single transaction. As long as you can prove immediate yield from your trade, you can set up a flash loan and profit from arbitrage trades no matter your profile, background or collateral. The only problem is: Most of us (Source Webpage) don’t have $100,000 at our disposal. Plus, the whole strategy is inherently low-risk. This is where flash loans come in.

This is because decentralized exchanges do not support custodial crypto wallets. Flash loans are an interesting (and pretty hi-tech) way to execute crypto arbitrage trades, using the power of smart contracts. Collateral is normally what provides certainty to a lender that you’ll repay the loan amount. First, they require zero collateral. No summary of crypto arbitrage trading would be complete without a mention of flash loans. Flash loans are an interesting concept for a couple of reasons.

The trader gets to pocket the $10 difference. How Does Crypto Arbitrage Work? To understand how crypto arbitrage trading works, firstly, you need to know that crypto exchanges can have slightly different prices for specific assets, as well as different methods of determining those prices. Of course, crypto assets are no exception to this trading strategy. In a similar sense, an article found in a “thrift” store might be marked at low price; but that same article may fetch a premium on a dedicated vintage marketplace. The key takeaway? The same asset may have differing values on separate markets, and there is always someone waiting to take advantage of that difference.

However, since a flash loan will not even begin to execute unless the payback is already guaranteed (thanks smart contracts), it requires no collateral from the trader. If the loan can not be paid back immediately, and within the same transaction, it will not be executed in the first place. But where does that fit into our arbitrage equation? So there is no lengthy approval process, and no need to stake any other assets. Well, imagine an exchange sells a particular token for $100 dollars and exchange Y sells the same token for $101.