lisawangyilu / defi-smart-contract

Created a smart contract using Aave V2 that preforms a flash loan based liquidation, and an asset exchange in one blockchain transaction. Making a profit of 47 eth from this transaction.

Project Overview

Created a smart contract in solidity using Aave V2 that performs a flash loan-based liquidation and an asset exchange in one blockchain transaction, making a profit of 47 ETH.

Background on project

The following background information for describing elements of this project.

Aave liquidation

To trigger a liquidation on Aave, you need to call a public function liquidationCall provided by the Aave smart contracts. In the function, you can specify user representing the borrowing position you would like to liquidate, debtAsset, the cryptocurrency you would like to repay (let's say token D), and collateralAsset, the collateral cryptocurrency you would like claim from the borrowing position (let's say token C). You also specify the amount of debt you want to repay, debtToCover.

function liquidationCall(
    address collateralAsset,
    address debtAsset,
    address user,
    uint256 debtToCover,
    bool receiveAToken
  ) external;

By calling this function, you then repay some amount of token D to Aave and in return, some token C is sent to your account.

You should make sure that the user is in a liquidatable state. Otherwise, the aave smart contract would revert your transaction and you would pay transaction fees for an unsuccessful liquidation.

Uniswap flash loan

What if you don't have any upfront token D, but you do need some to repay in the liquidation? You can use flash loans! A Uniswap flash loan (a.k.a flash swap) can grant you the cryptocurrencies available in the pool without any collateral, as long as you preserve the constant K in the end of the transaction. Check out the detailed code snippet (Uniswap V2) in the following.

function swap(uint amount0Out, uint amount1Out, address to, bytes calldata data) external lock {
    require(amount0Out > 0 || amount1Out > 0, 'UniswapV2: INSUFFICIENT_OUTPUT_AMOUNT');
    (uint112 _reserve0, uint112 _reserve1,) = getReserves(); // gas savings
    require(amount0Out < _reserve0 && amount1Out < _reserve1, 'UniswapV2: INSUFFICIENT_LIQUIDITY');

    uint balance0;
    uint balance1;
    { // scope for _token{0,1}, avoids stack too deep errors
    address _token0 = token0;
    address _token1 = token1;
    require(to != _token0 && to != _token1, 'UniswapV2: INVALID_TO');
    if (amount0Out > 0) _safeTransfer(_token0, to, amount0Out); // optimistically transfer tokens
    if (amount1Out > 0) _safeTransfer(_token1, to, amount1Out); // optimistically transfer tokens
    if (data.length > 0) IUniswapV2Callee(to).uniswapV2Call(msg.sender, amount0Out, amount1Out, data);
    balance0 = IERC20(_token0).balanceOf(address(this));
    balance1 = IERC20(_token1).balanceOf(address(this));
    }
    uint amount0In = balance0 > _reserve0 - amount0Out ? balance0 - (_reserve0 - amount0Out) : 0;
    uint amount1In = balance1 > _reserve1 - amount1Out ? balance1 - (_reserve1 - amount1Out) : 0;
    require(amount0In > 0 || amount1In > 0, 'UniswapV2: INSUFFICIENT_INPUT_AMOUNT');
    { // scope for reserve{0,1}Adjusted, avoids stack too deep errors
    uint balance0Adjusted = balance0.mul(1000).sub(amount0In.mul(3));
    uint balance1Adjusted = balance1.mul(1000).sub(amount1In.mul(3));
    require(balance0Adjusted.mul(balance1Adjusted) >= uint(_reserve0).mul(_reserve1).mul(1000**2), 'UniswapV2: K');
    }

    _update(balance0, balance1, _reserve0, _reserve1);
    emit Swap(msg.sender, amount0In, amount1In, amount0Out, amount1Out, to);
}

Importantly, Uniswap would attempt to call into the receiver to invoke the function uniswapV2Call after sending the flash loan assets. This means that you need a smart contract to accept a flash loan. The smart contract should have an uniswapV2Call function and you can program how you use the flash loan assets in this function.

if (data.length > 0) IUniswapV2Callee(to).uniswapV2Call(msg.sender, amount0Out, amount1Out, data);

Back to liquidation, you can program the liquidation logic in the uniswapV2Call function. So, when you don't have enough token D to perform a liquidation, you can request a flash loan and your smart contract can do the liquidation after receiving token D.

After Liquidation

With the flash loan, you now have enough token D. You can repay the debt for the borrowing position and claim the collateral token C. Congratulation! A successful liquidation is completed, but, wait, you still need to repay the flash loan. Remember that you need to preserve the K.

Prerequisite To Run this Project

• You need to register an account on https://www.alchemy.com/ for access to an archive Ethereum node.

• Have docker installed on your machine.

Commands To Run this Project

To test your contract:

1. docker build -t defi-mooc-lab2 .
2. docker run -e ALCHE_API="$YOUR ALCHEMY ETHEREUM MAINNET API" -it defi-mooc-lab2 npm test