V-Cred: Enabling flash-loans in Avalanche

TL;DR This project is the first to bring flash-loans to Avalanche C-Chain. Avalanche has an innovative consensus mechanism, and is an incredibly lightweight protocol, so it was fun implementing flash-loans on it.

The code submitted for Encode hackathon: a working prototype is available here: https://github.com/vijayengineer/V-Cred-Avalanche. A video demonstrating the prototype: https://www.youtube.com/watch?v=6q6sB2VPbQI

Let us start by describing what is a flash loan:

Simple flash-loan description

Flash Loan, is an emerging service in the decentralised finance ecosystem which allows traders to request a non-collateral loan as long as the debt is repaid within a single transaction. If the transaction reverts fees are not paid, and just gas fees are incurred by borrower.

Avalanche C-Chain:

Avalanche features 3 built-in blockchains: Exchange Chain (X-Chain), Platform Chain (P-Chain), and Contract Chain (C-Chain). A detailed overview of Avalanche platform is provided here. A C-Chain is an instance of the EVM running on avalanche. A detailed description of their consensus algorithm is provided here.

Thus avalanche C-Chain provides an easy on-ramp to incorporate smart contracts and development tools for the DeFi developer. Let us examine the standard use cases for flash loans:

• Arbitrage between decentralised exchanges: Looking at differences in pricing or inefficiencies between exchanges
• Liquidation of crypto loans on lending platforms like Compound, dYdX, etc.: The main purpose is to prevent any liquidation fees
• Refinancing Crypto Loans or Maker Vaults: interest rate swaps to exploit better interest rates for refinancing.

In the case of avalanche the ability to transfer assets between C-Chain and X-Chain providing interesting use cases on financial primitives. Availability of potentially 1000x leverage in one transaction with the speed of avalanche network will provide disruptive use cases.

Scope:

To demonstrate the capability of flash loans, and to have the capability in the future to work across different chains a new token CRED will be used. This will act as a flash loan fee payment, and liquidity token enabling flash loans across different chains. As a first step the tokens and contracts will be deployed on Fuji testnet.

At this point in time, there is no Oracle implemented on C-Chain, however once the Ethereum Bridge is complete there is a lot of interesting possibilities. This limits the scope of the prototype, thus the prototype flash-loan will essentially be a template without performing the actual use case for example arbitrage.

Goals are:

1. Deploy an ERC-20 token on Fuji testnet
2. Develop and deploy smart contracts necessary for flash loan.
3. Perform a flash loan which will repay the fees to demonstrate the concept.

Flash-loan implementation:

The basic logic of the Flash Loan smart contract is:

1. Call a Lending Pool requesting some amount of ERC20 compatible assets
2. Lending Pool transfers the requested amount
3. User adds their logic to the smart contract
4. The smart contract checks the final balance after execution. If the balance checks out the transaction are accepted and if not — reverted

For V-Cred prototype a a simpler and safer design pattern was adopted:

1. Re-entrancy guard by having a separate lending pool i.e. deposit pool contract and borrower contract.
2. Lender deposits on the deposit pool contract, and can only withdraw from lending pool contract
3. Borrower checks borrow fee or rate, and then performs the flash borrow eliminating interest rate threat.
4. Loan repayment is performed i.e. request is recorded before the transaction is sent out.

(This is however an MVP so please do not use this in production. )

MVP:

Cred token:

As discussed in the scope the first step involved deployment of an ERC-20 token Cred on Fuji testnet. This is fairly straightforward, using truffle and Openzeppelin tokenminter. Please follow this tutorial.

In my case since there was already a raspberry Pi connected to Fuji testnet, I could use it to deploy the contracts directly on test-net. About 1 million Cred tokens were minted with a majority going to a whale or liquidity provider address, and small amounts of tokens to addresses mimicking the real world.

V-Cred token deployment

Safer flash-loan:

1. As outlined in the previous section the first component is a deposit pool contract. Liquidity providers will deposit their Cred tokens in this contract to earn risk free interest. This is as close to a definition of risk-free interest as it gets, since the loan must be repaid for the lending transaction to succeed. This is deployed on the fuji testnet on the C-chain at 0xa1Ba1E7dD7AD2C72A25650ceECaa617319D5Cffb
2. The flash module contract is the second component where the hackers/traders will deposit their fees to perform leveraged trading. The flashloan contract is deployed on the Fuji testnet at: 0x19AB2715b478dc39A16A8CdCA0dD78304c3eE528

To start the process, as shown in the diagram below, the liquidity provider deposits about 250000 Cred into the deposit pool. To demonstrate this capability a 1000x leveraged borrow was done. So a trader deposited 250 Cred to take a 250000 Cred loan.

C-Chain flash loan

This transaction recorded on Fuji-testnet is to my knowledge the first flash loan transaction on Avalanche C-Chain: 0xd64a36f7b25956d5f6e45b6acab0d794de5cb5b41ff329f7c33dfda62ddc28e1

It was interesting to see the rapidity of the transaction, and is demonstrated here: https://www.youtube.com/watch?v=6q6sB2VPbQI

Next Steps:

With the launch of oracles, and Ethereum Bridge there are several avenues to take V-Cred further:

1. Use the ability to do cross-chain transfers, and increased interoperability to perform arbitrage and reduce inefficiencies.
2. Generate new synthetic assets, exchanging them for ERC-20 tokens like Cred to perform delegated credits using flash loans.
3. Use flash-loans to short synthetic assets with stable-coins providing the necessary collateral.

Code for the prototype is available at: https://github.com/vijayengineer/V-Cred-Avalanche