Vexchange flash swaps allow you to withdraw up to the full reserves of any VIP180 token on Vexchange and execute arbitrary logic at no upfront cost, provided that by the end of the transaction you either:
Flash swaps are incredibly useful because they obviate upfront capital requirements and unnecessary order-of-operations constraints for multi-step transactions involving Vexchange.
One particularly interesting use case for flash swaps is capital-free arbitrage. It’s well-known that an integral part of Vexchange’s design is to create incentives for arbitrageurs to trade the Vexchange price to a “fair” market price. While game-theoretically sound, this strategy is accessible only to those with sufficient capital to take advantage of arbitrage opportunities. Flash swaps remove this barrier entirely, effectively democratizing arbitrage.
Imagine a scenario where the cost of buying 1 VET on Vexchange is 200 DAI (which is calculated by calling getAmountIn with 1 VET specified as an exact output), and on Oasis (or any other trading venue), 1 VET buys 220 DAI. To anyone with 200 DAI available, this situation represents a risk-free profit of 20 DAI. Unfortunately, you may not have 200 DAI lying around. With flash swaps, however, this risk-free profit is available for anyone to take as long as they’re able to pay gas fees.
The first step is to optimistically withdraw 1 VET from Vexchange via a flash swap. This will serve as the capital that we use to execute our arbitrage. Note that in this scenario, we’re assuming that:
It may be the case that we’d like to calculate the profit-maximizing trade on-chain at the moment of execution, which is robust to price movements. This can be somewhat complex, depending on the strategy being executed. However, one common strategy is trading as profitably as possible against a fixed external price. (This price may be e.g. the average execution price of one or more orders on Oasis.) If the Vexchange market price is far enough above or below this external price, the following example contains code that calculates the amount to trade over Vexchange for maximum profit: VexchangeV2Router02.sol.
Once we’ve obtained our temporary capital of 1 VET from Vexchange, we now can trade this for 220 DAI on Oasis. Once we’ve received the DAI, we need to pay Vexchange back. We’ve mentioned that the amount required to cover 1 VET is 200 DAI, calculated via getAmountIn. So, after sending 200 of the DAI back to the Vexchange pair, you’re left with 20 DAI of profit!
Flash swaps can be used to improve the efficiency of levering up using lending protocols and Vexchange.
Consider Maker in its simplest form: a system which accepts VET as collateral and allows DAI to be minted against it while ensuring that the value of the VET never drops below 150% of the value of the DAI.
Say we use this system to deposit a principal amount of 3 VET, and mint the maximum amount of DAI. At a price of 1 VET / 200 DAI, we receive 400 DAI. In theory, we could lever this position up by selling the DAI for more VET, depositing this VET, minting the maximum amount of DAI (which would be less this time), and repeating until we’ve reached our desired leverage level.
It’s quite simple to use Vexchange as a liquidity source for the DAI-to-VET component of this process. However, looping through protocols in this way isn’t particularly elegant, and can be gas-intensive.
Luckily, flash swaps enable us to withdraw the full VET amount upfront. If we wanted 2x leverage against our 3 VET principal, we could simply request 3 VET in a flash swap and deposit 6 VET into Maker. This gives us the ability to mint 800 DAI. If we mint as much as we need to cover our flash swap (say 605), the remainder serves as a safety margin against price movements.