As discussed in the Vault section, the consolidated liquidity in the Vault does not improve price impact on a per-pool basis, but it does enable Balancer Protocol to leverage that combined liquidity by offering Flash Loans. Flash Loans, originally created by Aave, are uncollateralized loans that must be repaid (plus interest) in the same transaction as they is borrowed. If a strategy is unable to repay the loan, the entire transaction is reverted, returning all borrowed tokens to the Vault.
What does a sample Flash Loan transaction look like?
Borrow X amount of DAI, up to the total amount of DAI available in the Vault.
Any maneuver that can be profitable within the span of a single transaction is worth performing with a flash loan. Two of the most common flash loan use cases are arbitrage and collateral swap:
Trade DAI for TokenA on one DEX
Trade TokenA for DAI on another DEX
Pay off DAI loan for collateral
Trade collateral for TokenA
Take out another DAI loan with TokenA as collateral
final_amount >= X * (1 + interest_rate)
If successful, repay
X * (1 + interest_rate) of DAI and keep profit (if any)
If unsuccessful, revert transaction and lose gas fee
Further, anyone who identifies a price discrepancy in two Balancer Pools can execute a Flash Swap. An arbitrageur who makes a flash swap does not need to hold any of the input tokens that one would normally need to make a trade. Instead, the trader identifies the imbalance, tells the Vault to make the swap, and is rewarded with the profit.