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WETH10 turbocharges the flash loan concept

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A team has released WETH10, the latest iteration of the Wrapped Ether token that allows using Ether (ETH) in a DeFi setting. WETH10 carries a host of useful features, the most notable of which is the flash mint, an evolution of the flash loan concept.

Flash loans allow users to borrow the entire liquidity pool of a protocol to use as they see fit, without posting collateral. The only limitation is that the loan must be returned in full within the same transaction, otherwise the loan will never exist in the first place.

In the DeFi community, flash loans are primarily a tool for arbitrage, as they offer an unlimited source of funds for anyone transacting entirely within the DeFi ecosystem. This includes liquidation bots, with one lucky liquidator making $4 million from scratch in November by using flash loans. Another class of flash loan users are hackers and protocol exploiters, who often use them as a source of funds for their attacks.

The flash loan’s prevalence in hacks has made the concept somewhat controversial, with some arguing that they are net negative for the ecosystem and should be removed. For others, they represent one of few meaningful DeFi innovations, which democratizes access to arbitrage.

One limitation of flash loans is that the total sum available for a transaction is limited by the liquidity locked in a particular protocol. This is where the concept of a flash mint comes into play — instead of taking funds from a liquidity pool, the mechanism mints tokens out of thin air and destroys them once no longer necessary.

The amount that can be obtained from a WETH10 mint is not really infinite, Alberto Cuesta Cañada, technical lead for Yield Protocol and developer of WETH10, told Cointelegraph:

“The only limitation to flash mints of WETH10 is that the flash minted amount can never exceed 2^112-1 at any given time.”

In decimal terms, the number quoted by Cuesta Cañada has 33 zeros, which should be enough to cover any liquidity needs in DeFi. In practice, if the user needs to unwrap the WETH for a particular use, there may be limitations due to how much ETH is stored on the WETH contract.

Most DeFi protocols actually use WETH in the backend, though they hide this from users by automatically wrapping and unwrapping it at each interaction. If they were to switch to WETH10, the flash mint could grow to its full potential.

Will projects adopt the new standard?

“The new standard will be adopted slowly, it it gets adopted,” said Cuesta Cañada. “It is not users, but applications, that might adopt WETH10, and nothing might be seen for at least a couple of months.”

Adopting WETH10 only for the risk of amplifying potential losses from coding mistakes may be a tough proposition, but the new token carries a host of other advantages. WETH10 includes the ability to make transactions free for the end user, and it skips the “approve token” mechanic to save on gas costs and avoid security threats. An additional benefit of WETH10 is that its flash mint is completely free, unlike flash loan protocols levying their own fees.

Cuesta Cañada believes that newer projects will have an easier time integrating the standard, with existing names possibly doing so in their next releases. It is yet unclear if DeFi projects believe the risks of flash mints outweigh the benefits from the new WETH standard. “No one has committed to use it yet, but we haven’t gone looking for it either,” said Cuesta Cañada. He concluded:

“If the selling proposition of WETH10 is good enough, it will be adopted. If it is not, such is life, we all learnt a lot and had a great time coding it.