A Complete Guide to Aave Flash Loan Arbitrage using Hardhat

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Decentralized Finance (DeFi) has unlocked groundbreaking opportunities for developers and traders alike. Among the most innovative strategies is flash loan arbitrage—a technique that leverages uncollateralized loans to exploit price discrepancies across decentralized exchanges. In this comprehensive guide, you’ll learn how to build, deploy, and execute a fully functional Aave flash loan arbitrage smart contract using Hardhat, one of the most powerful Ethereum development environments.

Whether you're a blockchain developer or a DeFi enthusiast, this step-by-step tutorial will equip you with practical skills to explore profit-generating mechanisms in the Web3 ecosystem.

Prerequisites for Flash Loan Arbitrage Development

Before diving into coding, ensure you meet the following prerequisites:

👉 Get started with advanced DeFi development tools and resources here.

If you're new to Hardhat, it's recommended to review the official documentation before proceeding.

Setting Up Your Hardhat Project

Step 1: Initialize a New Hardhat Project

Open your terminal and run the following commands:

npm install --save-dev hardhat
npx hardhat

Follow the prompts to create a new project. Choose the default settings for simplicity.

Step 2: Install Required Dependencies

Install essential packages for testing, deployment, and interacting with Aave:

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

These include support for contract deployment, testing, gas reporting, and integration with Aave’s core protocols.

Step 3: Configure Environment and Project Structure

Create a .env file in your root directory and add your network credentials:

SEPOLIA_RPC_URL=https://eth-sepolia.g.alchemy.com/v2/your-api-key
PRIVATE_KEY=your-wallet-private-key

Update hardhat.config.js with network configurations:

require("@nomiclabs/hardhat-waffle");
require("hardhat-deploy");
require("dotenv").config();

const SEPOLIA_RPC_URL = process.env.SEPOLIA_RPC_URL || "https://eth-sepolia.g.alchemy.com/v2/YOUR-API-KEY";
const PRIVATE_KEY = process.env.PRIVATE_KEY || "0x";

module.exports = {
  defaultNetwork: "hardhat",
  networks: {
    hardhat: { chainId: 31337 },
    sepolia: {
      url: SEPOLIA_RPC_URL,
      accounts: PRIVATE_KEY ? [PRIVATE_KEY] : [],
      chainId: 11155111,
    },
  },
  namedAccounts: {
    deployer: { default: 0 },
    player: { default: 1 },
  },
  solidity: {
    compilers: [{ version: "0.8.7" }, { version: "0.8.10" }],
  },
};

Create helper-hardhat-config.js to store testnet addresses:

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

module.exports = { networkConfig };

Final project structure:

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

Smart Contract Development

We’ll work with two core contracts: a simulated DEX and the flash loan arbitrage executor.

Dex.sol – Simulating a Decentralized Exchange

This contract mimics a DEX with fixed exchange rates between DAI and USDC:

// SPDX-License-Identifier: MIT
pragma solidity 0.8.10;

import {IERC20} from "@aave/core-v3/contracts/dependencies/openzeppelin/contracts/IERC20.sol";

contract Dex {
    address payable public owner;
    IERC20 private dai;
    IERC20 private usdc;

    uint256 dexARate = 90; // Buy DAI at $0.90
    uint256 dexBRate = 100; // Sell DAI at $1.00

    mapping(address => uint256) public daiBalances;
    mapping(address => uint256) public usdcBalances;

    constructor(address _daiAddress, address _usdcAddress) {
        owner = payable(msg.sender);
        dai = IERC20(_daiAddress);
        usdc = IERC20(_usdcAddress);
    }

    function depositUSDC(uint256 _amount) external {
        usdcBalances[msg.sender] += _amount;
        require(usdc.allowance(msg.sender, address(this)) >= _amount);
        usdc.transferFrom(msg.sender, address(this), _amount);
    }

    function depositDAI(uint256 _amount) external {
        daiBalances[msg.sender] += _amount;
        require(dai.allowance(msg.sender, address(this)) >= _amount);
        dai.transferFrom(msg.sender, address(this), _amount);
    }

    function buyDAI() external {
        uint256 daiToReceive = ((usdcBalances[msg.sender] / dexARate) * 100) * (10**12);
        dai.transfer(msg.sender, daiToReceive);
    }

    function sellDAI() external {
        uint256 usdcToReceive = ((daiBalances[msg.sender] * dexBRate) / 100) / (10**12);
        usdc.transfer(msg.sender, usdcToReceive);
    }

    function withdraw(address _tokenAddress) external onlyOwner {
        IERC20(_tokenAddress).transfer(msg.sender, IERC20(_tokenAddress).balanceOf(address(this)));
    }

    modifier onlyOwner() {
        require(msg.sender == owner, "Only owner can call");
        _;
    }

    receive() external payable {}
}

This contract allows users to deposit tokens and trade between DAI and USDC at differing rates—creating an arbitrage opportunity.

FlashLoanArbitrage.sol – Executing Profitable Trades

This contract uses Aave’s FlashLoanSimpleReceiverBase to borrow funds, execute trades, and repay—all within one transaction.

// SPDX-License-Identifier: MIT
pragma solidity 0.8.10;

import {FlashLoanSimpleReceiverBase} from "@aave/core-v3/contracts/flashloan/base/FlashLoanSimpleReceiverBase.sol";
import {IPoolAddressesProvider} from "@aave/core-v3/contracts/interfaces/IPoolAddressesProvider.sol";
import {IERC20} from "@aave/core-v3/contracts/dependencies/openzeppelin/contracts/IERC20.sol";

interface IDex {
    function depositUSDC(uint256 _amount) external;
    function depositDAI(uint256 _amount) external;
    function buyDAI() external;
    function sellDAI() external;
}

contract FlashLoanArbitrage is FlashLoanSimpleReceiverBase {
    address payable owner;
    address private dexContractAddress = 0x81EA031a86EaD3AfbD1F50CF18b0B16394b1c076;
    
    IERC20 private dai;
    IERC20 private usdc;
    IDex private dexContract;

    constructor(address _addressProvider, address _daiAddress, address _usdcAddress)
        FlashLoanSimpleReceiverBase(IPoolAddressesProvider(_addressProvider))
    {
        owner = payable(msg.sender);
        dai = IERC20(_daiAddress);
        usdc = IERC20(_usdcAddress);
        dexContract = IDex(dexContractAddress);
    }

    function executeOperation(
        address asset,
        uint256 amount,
        uint256 premium,
        address initiator,
        bytes calldata params
    ) external override returns (bool) {
        // Deposit USDC and buy DAI cheaply
        dexContract.depositUSDC(1000000000); // 1,000 USDC
        dexContract.buyDAI();
        
        // Deposit DAI and sell at higher rate
        dexContract.depositDAI(dai.balanceOf(address(this)));
        dexContract.sellDAI();

        // Repay flash loan + premium
        uint256 amountOwed = amount + premium;
        IERC20(asset).approve(address(POOL), amountOwed);

        return true;
    }

    function requestFlashLoan(address _token, uint256 _amount) public {
        POOL.flashLoanSimple(address(this), _token, _amount, "", 0);
    }

    function withdraw(address _tokenAddress) external onlyOwner {
        IERC20(_tokenAddress).transfer(msg.sender, IERC20(_tokenAddress).balanceOf(address(this)));
    }

    modifier onlyOwner() {
        require(msg.sender == owner, "Only owner");
        _;
    }

    receive() external payable {}
}

The executeOperation function performs the arbitrage:

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Deployment Scripts

Deploy DEX Contract

deploy/00-deployDex.js:

const { networkConfig } = require("../helper-hardhat-config");

module.exports = async ({ getNamedAccounts, deployments }) => {
  const { deploy } = deployments;
  const { deployer } = await getNamedAccounts();
  const chainId = network.config.chainId;

  const args = [
    networkConfig[chainId].daiAddress,
    networkConfig[chainId].usdcAddress,
  ];

  await deploy("Dex", { from: deployer, args, log: true });
};
module.exports.tags = ["dex"];

Deploy Flash Loan Contract

deploy/01-deployFlashLoanArbitrage.js:

module.exports = async ({ getNamedAccounts, deployments }) => {
  const { deploy } = deployments;
  const { deployer } = await getNamedAccounts();
  const chainId = network.config.chainId;

  const args = [
    networkConfig[chainId].PoolAddressesProvider,
    networkConfig[chainId].daiAddress,
    networkConfig[chainId].usdcAddress,
  ];

  await deploy("FlashLoanArbitrage", { from: deployer, args, log: true });
};
module.exports.tags = ["FlashLoanArbitrage"];

Deploy both contracts:

yarn hardhat deploy --tags dex --network sepolia
yarn hardhat deploy --tags FlashLoanArbitrage --network sepolia

Testing the Arbitrage Strategy

Use Hardhat or Remix IDE to simulate transactions:

Transaction flow:

  1. Borrow 1,000 USDC from Aave.
  2. Buy DAI at $0.90 → ~1,111 DAI.
  3. Sell DAI at $1.00 → ~1,111 USDC.
  4. Repay loan + fee (~$5).
  5. Net profit: ~$106 USDC.

Frequently Asked Questions

Q: What is a flash loan?
A flash loan is an uncollateralized loan that must be borrowed and repaid within a single blockchain transaction. If repayment fails, the entire transaction reverts.

Q: Can flash loans be used for profit?
Yes—through arbitrage, liquidations, or collateral swaps. Profitable strategies require precise execution and low gas overhead.

Q: Is flash loan arbitrage risky?
While the loan itself carries no default risk (due to atomic transactions), smart contract bugs or frontrunning can lead to losses.

Q: Which networks support Aave flash loans?
Aave supports flash loans on Ethereum, Polygon, Avalanche, and several testnets including Sepolia.

Q: Do I need real funds to test this?
No—use testnet tokens (Sepolia ETH, USDC, DAI) from faucets to safely experiment.

👉 Access testnet tokens and developer tools for DeFi experiments here.

Core Keywords

By mastering flash loan arbitrage with Aave and Hardhat, you're not just coding—you're building financial innovation. With careful testing and optimization, this strategy can scale into real-world DeFi applications. Keep experimenting, stay secure, and happy coding!