I would like to start a discussion inside the community of chances, dangers, and the overall future of flash loans/mints in the elastic finance world.
Flash loans are a new Defi primitive to provide uncollateralized loans.
First developed by AAVE, with flash loans it’s possible to borrow instantly “any” amount of collateral for exactly one transaction. If the collateral (plus possible interest rate) is not returned by the end of the transaction, the transaction is reverted.
As Ethereum transactions are atomic, no state is changed in case the flash loan fails.
More and more Defi-protocols provide flash loans of their underlying collateral or flash mints for their ERC20 tokens.
An incomplete list includes:
The MakerDAO governance has a Declaration of Intent to add a DAI Flash Mint Module. Currently, it seems to be stalled.
Interesting differences between some providers are the anticipated fees. AAVE and Balancer can only provide flash loans of their underlying collateral, and as they are money markets it seems reasonable to expect fees. Interestingly, Balancer provides a somewhat vague argumentation:
[...] Flash Loan fee will start at a small value to ensure there is always a cost of capital to create a flash loan on Balancer.
There is no cost to provide them though…
On the other side, MakerDAO and WETH10 can provide flash mints of their ERC20 tokens and while MakerDAO’s MIP anticipates fees too, WETH10 does provide flash mints for free!
The free option makes sense for WETH10 as there is no company, DAO or other kinds of stakeholder behind the contract and earnings would be somewhat useless.
Putting it nicely, flash loans helped a lot with hardening the whole Defi landscape. They are also praised as a democratization tool, mostly for arbitrage. IMHO it’s at the very least safe to say they are here to stay. But that’s probably not all.
Any ERC20 token used as “money” has reasons to provide flash minting abilities as this would help grow and harden their protocol ecosystem.
Ampleforth is designed as base money. A first natural, somewhat stable curve in a world of chaos.
Additionally, there seems to be a lot of focus on derivates deriving from AMPLs. Ampleforth could evolve as the foundation of many future protocols building upon it, elastic finance.
Questions and chances with flash minting AMPLs:
One of the positive side effects of flash loans is the hardening of the surrounding ecosystem. If AMPL evolves as the foundation of elastic finance, it would be nice to be able to use this tool from the very beginning.
Flash minting AMPLs provides the ability of “flash minting” derivates using AMPLs as an underlier. This ability would be kind of “built-in”.
- One could argue Ampleforth does not need to have earnings.
- In the long run, fees could become competitive.
- No fees are more inclusive.
- It does not have any costs to provide flash mints, why take fees?
Is it even possible to implement flash minting now that AMPL is decentralized?