$113 million in profit from empty hands This flash loan strategy turns stablecoins into the “Wild West”

5 key points:

  • The MIM-UST arbitrage strategy has generated over $113 million in profits over the past four months.
  • Essentially an advanced form of flash loan that requires no capital investment, you can get a 650x return on gas fees alone, and don’t require miners to tip high like sandwich arbitrage, or have smart contract coding skills.
  • The tactic has been gaining prominence on those low-profile liquidity pools, and thus has caught the attention of the public, especially sandwich attackers.
  • By using flash loans, the strategy avoids risk exposure by not holding positions during the trade. Two stablecoins are involved in this strategy, which can also reduce the uncertainty caused by the collapse of stablecoins.
  • Tools like EigenPhi provide insight into the ever-increasing liquidity of flash loans (providing virtually unlimited free leverage), which requires special attention.

“If it doesn’t make a sound, it’s already a blockbuster.”

The MEV noise on #NFTs, sandwich attacks, and Flashbots has been deafening for months. To take advantage of these strategies requires knowing how to weave complex measures into the code of smart contracts, i.e. bypassing different tokens and liquidity pools, which requires developing, updating and debugging the code to accommodate emerging and evolving protocols. Not to mention the surge in the size of capital required for a successful sandwich attack, especially when stablecoins are involved.

However, since November 14, 2021, the arbitrage strategy between the two stablecoins, MIM and UST alone, has reaped more than $113 million in profits, without the need to develop smart contracts. During the four months from the beginning of the year to March 23, 2022, 1419 arbitrage attempts have been observed, with an average profit of $80,096 and a cost of $122.5 per trade. The highest gain is $6,001,912 and is a pure profit. Overall, the MIM-UST strategy has a 650x return.

This article is the first in-depth report on this arbitrage technique.

Wandering around everyday cryptocurrency investors using lending platforms looking for opportunities, the whole thing looks like someone sneaking into a McDonald’s location unnoticed, finding the secret menu, tweaking the fryer and spending the cost of a small slice of french fries Cooked a Kobe beef meal. By contrast, others had to wait in line to order some sausage, egg and cheese crackers.

McDonald's sausage egg biscuit close-up

McDonald’s sausage egg biscuit close-up

As the only DeFi MEV and arbitrage big data platform, EigenPhi employs internal algorithms to discover amazing arbitrage behaviors from countless seemingly mundane transactions and expose them to the public. Since the discovery of this strategy, our skilled team has been monitoring the situation 24/7. According to our investigation, this free banquet music has spread to the ears of a special circle. But first, let’s dissect the trade using this strategy and show it here, hoping to get the attention of the relevant community.

The four pillars of this arbitrage strategy:

  1. Just one strategy using two stablecoins is enough to generate abnormally above-average profits.
  2. Utilizing two stablecoins minimizes the risk of a single stablecoin crashing.
  3. No programming skills are required to execute this strategy, it is highly productive and reduces operating expenses (OPEX).
  4. No holdings during execution means no risk exposure, while taking advantage of ample arbitrage opportunities brought about by the decoupling of algorithmic stablecoins.

Next, we can dig into the details to expose this demon.

Profit like magic

First, the strategy is essentially a flash loan practice, meaning you can lend out tokens, earn a profit and pocket it, and repay the loan instantly in a single transaction. If anything goes wrong during the transaction, the lender has nothing to lose because the entire process is rolled back. (Visit here‌ or here‌ for more detailed instructions.)

In general, you must know how to write a flash loan. We learn how flash loans work through a transaction disclosed by eigenphi.io.

3 million in profit from empty hands This flash loan strategy turns stablecoins into the "Wild West"

In this arbitrage trade shown above, the profit was over $101,000 while spending less than $30.1 in gas and swap fees in the liquidity pool. We determine its arbitrage type as spatial. Generally, spatial arbitrage requires understanding the exchange rate difference of a particular token between different liquidity pools, usually in Uniswap and Sushiswap. Trades that take advantage of the spread will benefit traders. But here’s a completely different monster.

Open the overview of the transaction details displayed on etherscan‌; you can find that there are five participants who jointly realized this arbitrage.

3 million in profit from empty hands This flash loan strategy turns stablecoins into the "Wild West"

  • Contracts starting with 0x59e: MIM Cauldronv2 Lending Protocol, deployed by the Abracadabra.Money team. it:

“Allows users to open loans, borrow MIMS, add leverage and repay. Abracadabra.money is a lending platform that uses interest tokens (ibTKNs) as collateral for borrowing USD-pegged stablecoins (Magic Internet Money – MIM) that can be used with as any other traditional stablecoin.”

  • Addresses starting with 0xD96‌, shown as Abracadabra.money’s Degenboare‌, deployed by Abracadabra.money, allow policies to create assets internally. Degenbox is a vault for loans, specifically for UST‌. The Cauldron mentioned above is built on top of Degenbox.
  • The address starting with 0xFF4 is the UstSwapper deployed by Abracadabra.money.
  • Addresses starting with 0x55A are liquidity pools based on Curve’s simple pool, used to exchange MIM-UST on Curve.fi. The external oracle sets the exchange rate here.
  • The address starting with 0xb98 is the trader who started this transaction.

The diagram below illustrates the token exchange process.

3 million in profit from empty hands This flash loan strategy turns stablecoins into the "Wild West"

  1. The trader borrowed 243,098.235492 UST from Degenbox and called USTSwapper.
  2. The trader instructs USTSwapper to exchange 243,098.235492 UST for 244,132.700775 MIM in the MIM-UST-f Curve pool using the exchange rate here.
  3. The trader instructed to send 244,132.700775 MIM back to Degenbox to repay the borrowed asset.
  4. The trader tells Degenbox to exchange 244,132.700775 MIM for UST and pay the loan that occurred in step 1. According to its own public exchange rate, Degenbox swapped out 344,119.620672 UST, held 243,098.235492 UST for loans, and left 101,021.385180 UST for returns. The trader took 101,021.385180 UST without hesitation. Then, the transaction ends.

At EigenPhi, we’ve simplified the confusing process by showing only meaningful transaction knowledge in the token flow chart below. You can see that there are two liquidity pools involved. Degenbox is on the first row, indicating that the trader sent 244,132.700775 MIM and received 344,119.620672 UST. The second row is the MIM-UST-f Curve pool, showing that the trader received 244,132.700775 MIM to send 243,098.235492 UST. The last line shows that the trader received 101,021.385180 UST as a net profit.

3 million in profit from empty hands This flash loan strategy turns stablecoins into the "Wild West"

However, what “mantra” are traders using to allow this to happen on a heavily promoted DeFi lending platform without noticing?

We must dig deeper into what’s going on at the code level to discover how traders can switch fryers with the help of a secret menu**.

Refresh the code from the inside out to get a golden lottery ticket

**ALERT:** If you know the precise technical details, read on. Otherwise, we recommend that you skip the steps below unless you realize that traders have a solid understanding of the Cauldron V2 protocol and can use multiple internal methods (such as putting together Lego bricks) to manage flash loans without writing and deploying intelligence contract.

  1. Traders use the cook() method of the Cauldron V2 protocol to assemble a set of executable instructions into method parameters suitable for a single transaction, a prerequisite for flash loans. At the same time, the cook() method can be executed without being on the chain. The parameters of the Cook() method can take
  2. The trader calls the ACTION_UPDATE_EXCHANGE_RATE method, which will call the contract’s internal accrue() method to get the loanable asset.
  3. Traders call Cauldron V2’s internal method _removeCollateral() in exchange for UST.
  4. The trader calls USTSwapper to exchange UST for MIM.
  5. Traders use Cauldron V2’s internal _repay() method to save MIM back to Degenbox for arbitrage positions.
  6. The _removeCollateral() method is called again, and the trader releases the collateral.
  7. The trader calls the withdraw() method and withdraws the UST position. The spell ends.

On further exploration, EigenPhi discovered that Degenbox’s code was SushiSwap’s vault: a fork of BentoBox, the cornerstone of lending and margin trading platform Kashi.

In summary, here are the two conditions required to use this strategy successfully.

  1. Proficient in the cook() method of the Cauldron V2 protocol, eliminating the tedious coding, debugging, and deployment.
  2. Constantly understand exchange rate spreads to determine the best time.

Of course, it takes a few dollars worth of ETH to pay for the gas fee – in this case, the slightest effort, the biggest gain.

OK, time to check how many people are involved in this private arbitrage party.

Arbitrage Banquet Table Guest List

From November 14, 2021 to March 23, 2022, 1086 trader addresses executed the strategy 1419 times, as shown in the graph below. The blue bar is the number of transactions for the day.

3 million in profit from empty hands This flash loan strategy turns stablecoins into the "Wild West"

To make it easier to read the trend, the chart below treats the profit amounts logarithmically.

3 million in profit from empty hands This flash loan strategy turns stablecoins into the "Wild West"

Profits and transaction count peaked on January 27th and January 28th, which was the time of exposure for 0xSifu, the CFO of “Frog Nation”, a loose group of projects including Popsicle Finance, Wonderland and Abracadabra. The discovery dealt a heavy blow to MIM, sparking speculation of its de-pegging from the U.S. dollar. The 27th MIM low was $0.9735 and the 28th low was $0.9776. However, the volatility of MIM creates a surprising range of arbitrage.

In those two days, 555 trades made over $50 million in profits, illustrating the perfect MEV storm when the coin rate breaks away.

The table below shows the 10 most profitable arbitrage trades over the entire time period using the MIM-UST strategy. We share data here with traders and transaction addresses, including all 1419 transactions in the table. So feel free to #DYOR. We are excited to see what you find and make it known.

3 million in profit from empty hands This flash loan strategy turns stablecoins into the "Wild West"

Conclusion: Stablecoins take you into a new world

People think of stablecoins as the anchor of the blockchain. Stability means lower volatility, which means lower returns. However, the 650x return on the MIM-UST arbitrage strategy between stablecoins defied common belief due to its inherent nature: flash loans. Over the past two years, flash loans have become a money multiplier for DeFi, introducing unlimited, near-free leverage with liquidity. Data from EigenPhi tells us that 100% of the arbitrage on DEX is either flash loans or flash swaps. Therefore, similar scenarios require special attention.

DeFi-based big data creates savvy knowledge and wisdom, and EigenPhi publishes insights on flash loan arbitrage to help build a healthier DeFi ecosystem.

For now, flash loans have sent stablecoins into the Wild West. With a proper understanding of newly created protocols, tools like EigenPhi, and an unbridled mindset and imagination, #arbitrage on stablecoins is not an unreachable bridge. Instead, it can transport you into new worlds, high places.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/113-million-in-profit-from-empty-hands-this-flash-loan-strategy-turns-stablecoins-into-the-wild-west/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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