A Complete Guide to Aave Flash Loan Arbitrage Using Hardhat

Introduction

Ready to explore flash loan arbitrage with Aave and Hardhat? This guide will walk you through leveraging DeFi to capitalize on price discrepancies. We’ll cover setup, execution, and optimization of flash loan arbitrage strategies step by step.

Prerequisites

Before starting, ensure you have:

1. Blockchain Basics: Understanding of blockchain and smart contracts.
2. Technical Skills: Familiarity with Ethereum and Hardhat (official docs).
3. Tools: Node.js and npm installed.

Project Setup

Step 1: Initialize a Hardhat Project

npm install --save-dev hardhat
npx hardhat

Select default settings during setup.

Step 2: Install Dependencies

yarn add --dev @nomiclabs/hardhat-ethers@npm:hardhat-deploy-ethers ethers @nomiclabs/hardhat-etherscan @nomiclabs/hardhat-waffle chai ethereum-waffle hardhat hardhat-contract-sizer hardhat-deploy hardhat-gas-reporter prettier prettier-plugin-solidity solhint solidity-coverage dotenv
yarn add @aave/core-v3

Step 3: Project Structure

- contracts/
  - FlashLoanArbitrage.sol
  - Dex.sol
- deploy/
  - 00-deployDex.js
  - 01-deployFlashLoanArbitrage.js
- scripts/
- test/
- hardhat.config.js
- .env
- helper-hardhat-config.js

Step 4: Configure Environment

1. .env File:

   SEPOLIA_RPC_URL=https://eth-sepolia.g.alchemy.com/v2/...
   PRIVATE_KEY=...

2. hardhat.config.js:

   require("@nomiclabs/hardhat-waffle");
   require("dotenv").config();
   
   module.exports = {
     networks: {
       sepolia: {
         url: process.env.SEPOLIA_RPC_URL,
         accounts: [process.env.PRIVATE_KEY],
       },
     },
     solidity: "0.8.10",
   };

3. helper-hardhat-config.js:

   const networkConfig = {
     11155111: {
       PoolAddressesProvider: "0x0496275d34753A48320CA58103d5220d394FF77F",
       daiAddress: "0x68194a729C2450ad26072b3D33ADaCbcef39D574",
       usdcAddress: "0xda9d4f9b69ac6C22e444eD9aF0CfC043b7a7f53f",
     },
   };

Smart Contracts

Dex.sol

Simulates a decentralized exchange (DEX) with functions for depositing, buying, and selling tokens:

• Key Features:

  • Deposit USDC/DAI.
  • Trade tokens at fixed rates (dexARate = 90, dexBRate = 100).
  • Owner-only withdrawals.

👉 View Full Dex.sol Code

FlashLoanArbitrage.sol

Executes arbitrage using Aave flash loans:

• Key Functions:

  • executeOperation: Core arbitrage logic (buy low, sell high).
  • requestFlashLoan: Initiates the flash loan.
  • Token approvals and balance checks.

👉 View Full FlashLoanArbitrage.sol Code

Deployment & Testing

Step 5: Deploy Contracts

1. Dex.sol:

   yarn hardhat deploy --tags dex --network sepolia

   • Output: 0x81EA031a86EaD3AfbD1F50CF18b0B16394b1c076

2. FlashLoanArbitrage.sol:

   yarn hardhat deploy --tags FlashLoanArbitrage --network sepolia

   • Output: 0xc30b671E6d94C62Ee37669b229c7Cd9Eab2f7098

Step 6: Test in Remix IDE

1. Adjust Imports:

   import {IERC20} from "https://github.com/.../IERC20.sol";

2. Add Liquidity:

   • Deposit 1500 USDC and 1500 DAI into Dex.

3. Request Flash Loan:

   • Borrow 1000 USDC to execute arbitrage.

Expected Outcome:

• Profit: 110.61 USDC after repaying the loan + fee.

FAQs

Q1: What is flash loan arbitrage?

A1: Borrowing funds without collateral to exploit price differences across exchanges, repaying the loan in the same transaction.

Q2: Why use Aave for flash loans?

A2: Aave offers low fees and seamless integration with DeFi protocols.

Q3: Can I test this on a local network?

A3: Yes! Use Hardhat’s local node or fork Sepolia.

Q4: What are the risks?

A4: High gas fees, failed transactions, or incorrect rates can lead to losses.

Conclusion

You’ve successfully set up and executed a flash loan arbitrage strategy using Aave and Hardhat. This opens doors to advanced DeFi opportunities—experiment further and optimize your strategies!

👉 Explore GitHub Repository