A Complete Guide to Aave Flash Loan Arbitrage Using Hardhat

Introduction

Are you ready to dive into the world of flash loan arbitrage with Aave and Hardhat? If you're looking to harness the power of decentralized finance (DeFi) to profit from price discrepancies, you're in the right place. This step-by-step guide will walk you through setting up and executing a flash loan arbitrage strategy using the Aave protocol and Hardhat development environment.

Prerequisites

Before we begin, ensure you have the following:

1. Solid understanding of blockchain and smart contracts.
2. Ethereum and Hardhat knowledge – Familiarity with Hardhat is essential. Check the official documentation if you're new.
3. Node.js and npm installed on your machine.

Project Setup

Step 1: Initialize a Hardhat Project

Run these commands in your terminal:

npm install --save-dev hardhat
npx hardhat

Follow the prompts to create a new Hardhat project with default settings.

Step 2: Install Dependencies

Add required dependencies:

yarn add --dev @nomiclabs/hardhat-ethers ethers @aave/core-v3 hardhat-gas-reporter dotenv

Step 3: Project Structure

Your directory should include:

- contracts/
  - FlashLoanArbitrage.sol
  - Dex.sol
- deploy/
- scripts/
- .env
- hardhat.config.js

Step 4: Configure Environment

Create a .env file with:

SEPOLIA_RPC_URL = YOUR_RPC_URL
PRIVATE_KEY = YOUR_PRIVATE_KEY

Update hardhat.config.js with Sepolia network details.

Smart Contracts

Dex.sol

Simulates a decentralized exchange with arbitrage opportunities. Key functions:

• depositUSDC / depositDAI: User deposits.
• buyDAI / sellDAI: Token swaps based on rates (dexARate = 90, dexBRate = 100).

FlashLoanArbitrage.sol

Core arbitrage contract:

1. Requests flash loans via requestFlashLoan.

2. Executes arbitrage in executeOperation:

   • Deposits USDC.
   • Buys DAI at lower rate, sells at higher rate.
3. Repays loan + premium.

Deployment

Deploy Dex.sol

yarn hardhat deploy --tags dex --network sepolia

Address: 0x81EA031a86EaD3AfbD1F50CF18b0B16394b1c076

Deploy FlashLoanArbitrage.sol

yarn hardhat deploy --tags FlashLoanArbitrage --network sepolia

Address: 0xc30b671E6d94C62Ee37669b229c7Cd9Eab2f7098

Testing

Use Remix IDE to:

1. Add liquidity to Dex (1500 USDC/DAI).
2. Approve tokens (1000 USDC, 1200 DAI).
3. Request flash loan (1000 USDC).

Arbitrage Flow:

1. Deposit 1000 USDC → Buy DAI → Sell DAI → Repay 1000.5 USDC.
2. Profit: ~110.61 USDC.

👉 Explore the GitHub Repository

FAQ

What is flash loan arbitrage?

It's borrowing funds without collateral to exploit price differences across platforms, repaying instantly within one transaction.

Why use Aave?

Aave offers decentralized flash loans with low fees (0.05%) and robust security.

Can I test locally?

Yes! Configure Hardhat for local testing or use Sepolia testnet.

Conclusion

You’ve now set up a flash loan arbitrage system using Aave and Hardhat. This guide covered project setup, contract logic, deployment, and testing. With these skills, you’re ready to explore more DeFi opportunities. Happy coding!

👉 Start your DeFi journey today