Bob is bullish on ETH and is holding $150 worth of ETH. He can use his $150 in ETH as collateral and receive a $100 USDC loan for example. Bob can then use the borrowed $100 USDC to buy ETH. Bob now has a $250 levered position on ETH to capture potential increase value of ETH.
Alice is bearish on ETH. She holds $150 USDC which she uses as collateral to receive $100 worth of ETH. Alice can now sell her $100 worth of ETH in the market and receive $100. Assuming Alice was right and ETH price dropped 20% she can now buy the same amount of ETH for $80. She can repay her ETH loan in full on zkLend and keep the profits, less the borrowing costs and transactions fees.
Efficient Liquidity Management
Alice holds a substantial amount of crypto. Selling it on CEXs or DEXs for a profit may incur large transaction fees. In order to avoid significant slippage, Alice decides to use her crypto as collateral and take a loan on stablecoins. These funds can now be used freely without having to monetise her crypto position and bearing significant transaction fees.
Using flash loans, Cedric can bundle all their trades into one transaction and save on transaction fees.
The transactions for the arbitrage operation would be the following:
1) Use a flash loan to borrow USDC;
2) Use USDC to buy ETH on Uniswap (assuming lower ETH price);
3) Sell the recently bought ETH on SushiSwap (higher ETH price) for USDC;
4) Repay USDC flash loan plus related fees.
Daphne has already taken out a loan with some crypto as collateral, she can replace the collateral with a different asset using flash loans. Let’s say she already took out a USDC loan using ETH as collateral. Daphne can take a USDC flash loan to repay her debt and collect the collateral ETH, she can then swap that ETH to the asset of her choice and use it as collateral to get another USDC loan.