Comment by downandout | Hacker News Reader

Comment by downandout | Hacker News Reader

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Bitcoin might fall into obsolescence, but it won’t be because it is mined. It simply isn’t as useful as ETH. I firmly believe that DeFi, which is based upon ETH’s smart contracts and distributed EVM concept, is the future of the finance and investing universe, even with its many issues today.

Flash loans/minting, for example, have turned the markets into the ultimate meritocracy. Anyone - rich or poor - can access up to hundreds of millions of dollars instantly to execute any profitable transaction, no human review or approval necessary. Liquidity pools, introduced by Uniswap, solved many of the problems and risks associated with holding thinly traded assets. Smart contracts have enabled any new project’s tokens to instantly have real value, because in most cases new tokens can only be released to the market by locking ETH into the contract in exchange for the new tokens.

These innovations, along with those that are coming, enable a shockingly large number of new opportunities in the finance world to a much larger audience than ever before. It might be a few years before security, market manipulation protections, etc. are mature enough for mass adoption. But the opportunities that DeFi enables will drive demand for ETH, in a way that today’s Bitcoin simply cannot.

> Anyone - rich or poor - can access up to hundreds of millions of dollars instantly to execute any profitable transaction, no human review or approval necessary

What does this mean? If I'm poor (or rich), why not borrow hundreds of millions of dollars to make some highly speculative trade? If it goes well, I win big; if it goes tits up, the lender loses big (not me).

I'm certain that's an uncharitable reading of your comment - please take it in the spirit of "this is what I'm asking you to explain to me in simpler terms," not as an argument.

Flash loans let anyone borrow a large amount of crypto with no collateral, provided the loan amount plus a fee is returned in the same transaction it is borrowed in. No collateral is required because there is no risk (assuming no exploits).

This means you can't take the highly speculative trade, you can only go for a sure thing. But if you do have a sure thing, you can borrow as much currency as the lender can provide.

So the loan and the return is a single "transaction" (in db terms)?

What sort of situation could this be used in? I'm having a hard time truly imagining use without any risk of transaction rollback.

They are primarily used for arbitrage transactions. Token swaps on decentralized exchanges are instant - there is no order book. So you can compose a single transaction that involves many exchanges, swaps involving different tokens, flash loans, etc. If the transaction ends with a profit after the loan is paid back, at the market prices that exist at the time the transaction is executed, the flash loan occurs, and profits are collected by the person that created the transaction. If it does not end with a profit, then the transaction is reverted as if it never existed.

How would that work, though? It sounds like guaranteed arbitrage? But does arbitrage work as a trading strategy? I thought markets quickly become too efficient for that?

It is guaranteed arbitrage. There is no risk to the lender, and the only risk to the person that initiated the transaction is that slippage will occur that makes the trade unprofitable, which would cause the transaction to revert, which would cause them to lose the transaction fee for having attempted the transaction.

The markets are not currently too efficient for that, and never will be. In fact Uniswap’s entire design depends heavily on arbitrageurs balancing out the markets between itself and other exchanges.

Wow this sent me down a rabbit hole.

How are the transactions composed, with a smart contract/s, in combination with Dex API’s?

Flash loans are composed using a smart contract. So basically you create a smart contract that will call all the DEX/loan platform/other contract functions necessary to obtain the loan, carry out swaps and pay it back. You then deploy that contract.

Then you would have a separate program running on your client machine to scan for market opportunities, and when it spots one, have that program send a transaction to your deployed smart contract to initiate the loan and set into action whatever logic you programmed into the smart contract that will yield a profit.

Yes, it’s quite a rabbit hole indeed. It is hard to believe that something like this is even possible, let alone profitable, but it really can be. I have seen single flash loan transactions yield up to $46k in profits. That profit is irrevocably delivered back to you in a couple of seconds.

Yea it’s really quite wild and an exciting application of the ‘programmable money’ concept. Did some more reading. Thanks for the rundown.

flash loans makes markets more efficient:

https://blog.instadapp.io/six-percent-instant-return/

Yes, and gas fees for failed transactions ensure you can’t just take unlimited shots at it either. However, if you are monitoring the markets and your code, connections to the network, etc. are fast enough, you can make a fortune using flash loans. A few days ago I found a trade where someone made $17k on a single trade [1] with the only necessary capital being a ~$170 transaction fee. They took a $250k flash loan that they successfully arbitraged. Smaller amounts are made all day every day.

[1] https://etherscan.io/tx/0xfd35e99cbbefea68874391a14ddb09a289...

The false premise you're using is that smart contracts provide more utility than sound economic policy does.

I don’t think that “sound economic policy” would, for example, have major banks offering flash loans. There are many things that can only be achieved through decentralization. Policymakers and banks alike have a serious interest in remaining gatekeepers, and would never enable many of the DeFi functions.

On the other hand, if flash loans are not sound economic policy, doesn't that imply they won't prevail? Evolution will weed them out.

How does sound economic policy differ from visual economic policy?

So what happens after Ethereum finishes migrating to proof of stake and has lower inflation than Bitcoin?

The problem is not what the inflation rate is at any given moment, but that it can be changed so easily, like the very switch to ETH 2 is an example of.

The inflation curve in Bitcoin is considered sacred. In Ethereum, it's developer whim and EIP approval.

It was known from the start that the PoW phase is just a temporary development phase, with no parameters set in stone. Eth2 has a deterministic inflation schedule that depends on total amount of stake.

  def calc_annual_reward(total_staked_eth):
     return math.exp(31556926 / 384 * 64 / 31622 / total_staked_eth ** 0.5) - 1

This is the return rate for validators - this should be multiplied by the average online percentage, eg. 0.9 if average participation is 90%. On top of that comes fee burning, which is inherently variable, but likely to lead to deflation at least initially. Extrapolating fees from the last 24 hours and assuming 10M eth is staked, the net result is a deflation of 1.3%.

Have you checked out rsk? It lives on top of bitcoin and apparently does smart contracts.

https://www.rsk.co

Is anything built on top of rsk up and running at this time?

From what I can understand from their official dashboard, the answer is no: https://stats.rsk.co

RSK MainNet launched about 3 years ago. Currently, most blocks have no transactions, with 0 gas spent.

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