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Yes, exactly. They sent the money to their creditors. Had they accidentally sent it to someone who they didn't owe money to, the courts would order the money to be returned.

And everything done in this case was in a smart contract. That’s the idea.

I don't think the smart contract explicitly said "there's this arbitrage opportunity available", but it's definitely a fine line.

This kind of automated index fund seems pretty suggestive of arbitrage to me.

And flash loan contracts are a bright neon sign saying "arbitrage opportunity!"

They repaid someone else's loan early.