Wouldn't a lender charge money for what is essentially an option to borrow contingent on the arbitrage transaction going through?
One interesting thing I think is still under dev/consideration is adding the ability for MakerDAO to make "flash mint loans"(https://forum.makerdao.com/t/mip25-flash-mint-module/4400/9) -- essentially a flash loan where the caller can mint an arbitrary amount of DAI without having to back it with anything, so long as they pay it back + fee at the end.
There's a similiar idea being worked out for WETH10 (https://github.com/WETH10/WETH10#flash-loans), a project trying to make a feature update of the WETH (wrapped ether) token.
I'm honestly unsure WTH the impact of something like these would be, but would definitely prevent arbitrage from going too far out of bounds, since there would always be unlimited liquidity.
Multi-party atomic financial transactions are kinda insane.
Aave is 0.09%: https://aave.com/flash-loans/
It is also an important part of uniswap: https://uniswap.org/docs/v2/core-concepts/flash-swaps/
Any fees on a flash loan will disincentive closing arbitrage positions to that fee amount.
Borrow x amount of tokens. (Withdraw)
Call a function (i.e. Logic to handle flashloaned funds). (Call)
Deposit back x (+2 wei) amount of tokens. (Deposit)
Because of the atomicity of the transaction, there's no way to default on the loan. If you can't pay it back, you're never loaned the money in the first place.
[1] https://medium.com/@kentmakishima/the-43k-defi-magic-trick-f...
Basically if you put $1000 of capital into the pot for making flash loans, then you are foregoing the X% / year that you could earn on interest, i.e. you are losing money.
It’s entirely possible that platforms are running these flash loans as a loss leader to drive adoption, but in a mature market and at scale, you’d expect there to be a small fee.
(Or just that the success-case fee covers the loss in the failure case, but that would break if the % of failed txns increased, so might not be a stable equilibrium. )
The funds aren't foregoing interest in all cases though. Ex: uniswap, curve, etc all require assets to be deposited, and pay depositors trading fees. These protocols could generate additional income by providing assets for flash loans without affecting the income received for acting as an amm.
For a lot of transactions like this its actually miners who can detect and rewrite these transactions to take advantage of the arbitrage opportunities first, for this reason this cost is called "miner extractable value" or MEV.
However, note this fee doesn't accrue to the lender!