027 Prd 261ed085

PRD: Flash Loan Simulator

Summary

One-liner: Simulate and analyze flash loan strategies with profitability calculations and risk assessment Domain: Cryptocurrency / DeFi / Flash Loans Users: DeFi Developers, Arbitrage Researchers, Smart Contract Auditors

Problem Statement

Flash loans are powerful DeFi primitives that allow borrowing any amount without collateral, provided the loan is repaid within the same transaction. However, evaluating flash loan strategies is challenging:

1. No easy way to simulate complex multi-step transactions before deployment
2. Profitability calculations require accounting for gas, fees, and slippage
3. Competition from MEV bots makes many strategies unprofitable
4. Risk assessment requires understanding multiple protocols simultaneously
5. Real execution on mainnet is expensive and risky for testing
6. Historical backtesting requires archive node access and complex setup

Target Users

Persona 1: DeFi Developer

• Profile: Building flash loan arbitrage bots or liquidation systems
• Pain Points: Testing on mainnet is expensive; needs simulation before deployment
• Goals: Validate profitability; optimize gas usage; identify edge cases
• Usage Pattern: Daily simulation runs during development cycle

Persona 2: Arbitrage Researcher

• Profile: Analyzes DeFi protocols for arbitrage opportunities
• Pain Points: Manual calculation of multi-hop arbitrage is error-prone
• Goals: Quickly evaluate opportunities; backtest historical scenarios
• Usage Pattern: Continuous opportunity scanning and analysis

Persona 3: Smart Contract Auditor

• Profile: Reviews DeFi protocols for vulnerabilities
• Pain Points: Needs to simulate attack vectors without executing them
• Goals: Understand flash loan attack scenarios; verify protocol safety
• Usage Pattern: Deep-dive analysis during security audits

User Stories

Critical (P0)

1. As a DeFi developer, I want to simulate a flash loan arbitrage between two DEXs, so that I can verify profitability before deploying my contract.

   • Acceptance Criteria:
     • Input: Token pair, loan amount, source DEX, target DEX
     • Output: Expected profit/loss after all fees
     • Includes gas cost estimation at current prices
     • Shows breakdown of each transaction step

2. As a researcher, I want to calculate liquidation profitability on Aave, so that I can identify profitable opportunities.

   • Acceptance Criteria:
     • Input: Borrower address or health factor threshold
     • Output: Liquidation bonus minus costs
     • Shows collateral and debt values
     • Estimates competition level

3. As a developer, I want to compare flash loan providers, so that I can choose the cheapest option.

   • Acceptance Criteria:
     • Compare Aave (0.09%), dYdX (0%), Balancer (variable)
     • Account for available liquidity per asset
     • Show total cost including gas differences

Important (P1)

4. As a researcher, I want to simulate triangular arbitrage, so that I can evaluate multi-hop strategies.

   • Acceptance Criteria:
     • Support 3+ DEX paths
     • Calculate cumulative slippage
     • Show optimal route and amounts

5. As a developer, I want to backtest strategies against historical data, so that I can validate my approach.

   • Acceptance Criteria:
     • Input: Strategy parameters, date range
     • Output: Historical profit/loss per opportunity
     • Shows win rate and average profit

Nice-to-Have (P2)

6. As an auditor, I want to simulate flash loan attack scenarios, so that I can test protocol security.
   • Acceptance Criteria:
     • Template attack patterns (price manipulation, governance, etc.)
     • Safe simulation without actual execution
     • Detailed transaction trace

Functional Requirements

Core Features

• REQ-1: Flash Loan Provider Support

  • Aave V3 (0.09% fee, multi-chain)
  • dYdX (0% fee, ETH mainnet)
  • Balancer (variable fee, multi-chain)
  • Uniswap V3 flash swaps (implicit fee)

• REQ-2: Strategy Simulation Engine

  • Simple arbitrage (2 DEX)
  • Triangular arbitrage (3+ DEX)
  • Liquidation profitability
  • Collateral swap simulation
  • Debt refinancing analysis

• REQ-3: Profitability Calculator

  • Gross profit from price differences
  • Flash loan fee deduction
  • Gas cost estimation (EIP-1559)
  • Slippage impact modeling
  • Net profit/loss after all costs

• REQ-4: Risk Assessment

  • MEV competition analysis
  • Execution risk scoring
  • Protocol risk factors
  • Liquidity depth checks

• REQ-5: RPC Configuration

  • Free public RPCs (Ankr, Infura, Chainstack)
  • Custom RPC endpoint support
  • Multi-chain configuration
  • Automatic fallback

Supported Strategies

Non-Goals

• NOT executing real flash loans (simulation only)
• NOT generating production-ready Solidity code
• NOT real-time opportunity alerts (analysis only)
• NOT MEV protection or Flashbots integration
• NOT managing private keys or signing transactions

API Integrations

Success Metrics

UX Flow

1. User Input
   ├── Strategy type (arbitrage, liquidation, etc.)
   ├── Parameters (tokens, amounts, DEXs)
   ├── Chain (Ethereum, Polygon, Arbitrum)
   └── RPC endpoint (default: free public)

2. Data Collection
   ├── Fetch current prices from DEXs
   ├── Query protocol state (Aave positions, etc.)
   ├── Get gas prices and estimates
   └── Check liquidity depth

3. Simulation Engine
   ├── Calculate gross profit
   ├── Deduct flash loan fees
   ├── Subtract gas costs
   ├── Apply slippage model
   └── Compute net profit/loss

4. Risk Analysis
   ├── Score MEV competition risk
   ├── Check execution feasibility
   ├── Assess protocol risks
   └── Rate overall viability

5. Results Output
   ├── Profit/loss breakdown
   ├── Step-by-step transaction flow
   ├── Risk assessment summary
   └── Recommendations

Constraints & Assumptions

Constraints

• Free RPC endpoints have rate limits (25-100 req/sec)
• Historical simulations require archive node access
• Gas estimates are approximations (actual may vary ±20%)
• Price data has latency (not real-time MEV-competitive)

Assumptions

• User understands DeFi and flash loan concepts
• User has access to RPC endpoint (free or paid)
• Simulation results are for analysis, not execution
• Market conditions change; simulations are point-in-time

Risk Assessment

Educational Disclaimer

IMPORTANT: This tool is for educational and research purposes only. Flash loan strategies involve significant risks:

• Smart contract bugs can cause total loss of funds
• MEV bots compete for the same opportunities
• Gas costs can exceed profits
• Protocol exploits may have legal implications

Users should:

• Never deploy unaudited code
• Start with testnets before mainnet
• Understand the risks fully
• Consult legal counsel if needed

Version History