Building Your First Smart Contract for Flash Loans in Solidity

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Smart contracts are the backbone of decentralized applications (dApps) on blockchain platforms like Ethereum. In this guide, we'll walk through creating a simple yet functional smart contract using Solidity, focusing on implementing flash loans—a powerful feature in decentralized finance (DeFi). This tutorial assumes basic knowledge of blockchain concepts and programming logic, but no advanced expertise is required.

By the end, you’ll understand how to write, structure, and deploy a flash loan-enabled contract that interacts with external protocols such as KeeperDAO’s LiquidityPool.

Understanding the Core Components of a Solidity Smart Contract

Before diving into code, let’s break down the essential building blocks of any Solidity contract. These include interfaces, libraries, state variables, functions, and modifiers—all working together to create secure and efficient on-chain logic.

Pragma Directive: Setting the Compiler Version

Every Solidity file starts with a version declaration to prevent compatibility issues:

pragma solidity 0.8.0;

This ensures your contract compiles with Solidity version 0.8.0 or higher, which includes built-in overflow checks—eliminating the need for external math libraries in many cases.

Interfaces: Connecting to External Contracts

To interact with other smart contracts on the blockchain, we define interfaces. These act as blueprints that specify which functions can be called without exposing internal logic.

ERC-20 Token Interface

The most widely used standard for tokens on Ethereum is ERC-20. Here's a simplified interface:

interface IERC20 {
    function totalSupply() external view returns (uint256);
    function balanceOf(address account) external view returns (uint256);
    function transfer(address recipient, uint256 amount) external returns (bool);
    function allowance(address owner, address spender) external view returns (uint256);
    function approve(address spender, uint256 amount) external returns (bool);
    function transferFrom(address sender, address recipient, uint256 amount) external returns (bool);
    function decimals() external view returns (uint8);
}

Functions marked view do not alter blockchain state and consume no gas when called externally. Others like transfer or approve initiate transactions that modify data and require gas fees.

Wrapped Ether (WETH) Interface

Since ETH isn’t ERC-20 compliant, it must be wrapped into WETH to work seamlessly in DeFi protocols:

interface IWETH {
    function deposit() external payable;
    function withdraw(uint wad) external;
}

👉 Learn how to integrate real-world DeFi tools into your development workflow.

Libraries: Safe Arithmetic Operations

Although Solidity 0.8+ includes automatic overflow protection, understanding legacy patterns like SafeMath is useful:

library SafeMath {
    function sub(uint256 a, uint256 b) internal pure returns (uint256) {
        require(b <= a, "SafeMath: subtraction overflow");
        return a - b;
    }
}

Libraries allow reusable functions across contracts. They’re especially valuable for critical operations where precision and safety are paramount.

Contract Structure: State Variables and Constructor

A contract in Solidity is similar to a class in object-oriented programming. It contains state variables (stored permanently on-chain) and functions (which manipulate those variables).

Defining Key Addresses

address owner;
address liquidityPool = 0x4F868C1aa37fCf307ab38D215382e88FCA6275E2;
address borrowerProxy = 0x17a4C8F43cB407dD21f9885c5289E66E21bEcD9D;
address WETH = 0xC02aaA39b223FE8D0A0e5C4F27eAD9083C756Cc2;

These addresses point to critical DeFi components:

Constructor: Setting Ownership

constructor() public {
    owner = address(tx.origin);
}

The constructor runs only once during deployment. Here, ownership is assigned to the original transaction sender (tx.origin), enabling permissioned access control.

Modifiers: Enforcing Access Control

Modifiers add conditions to functions. For example:

modifier onlyOwner() {
    require(msg.sender == owner, "No authority");
    _;
}

Applying onlyOwner to sensitive functions prevents unauthorized execution—a crucial security practice.

Fallback and Receive Functions: Handling ETH Transfers

To accept native ETH payments, your contract needs a receive() function:

receive() external payable {}

Without this, incoming ETH transfers will fail. The payable keyword allows value to be sent along with a function call.

Utility Functions: Managing Funds Safely

Here are essential functions for managing assets within your contract:

function getOwner() public view returns(address) {
    return owner;
}

function getTokenBalance(address token, address account) public view returns(uint256) {
    return IERC20(token).balanceOf(account);
}

function turnOutETH(uint256 amount) public onlyOwner {
    payable(owner).transfer(amount);
}

function turnOutToken(address token, uint256 amount) public onlyOwner {
    IERC20(token).transfer(owner, amount);
}
Always include withdrawal functions (turnOutETH, turnOutToken) in production contracts. Otherwise, funds risk being permanently locked.

Flash Loan Implementation: The Core Logic

Flash loans allow borrowing large amounts of crypto without collateral—provided the loan is repaid within the same transaction.

Step 1: Initiating the Loan

struct RepayData {
    address repay_token;
    uint256 repay_amount;
}

function flashLoan(address token, uint256 amount) public {
    RepayData memory _repay_data = RepayData(token, amount);
    ILiquidity(liquidityPool).borrow(
        token,
        amount,
        abi.encodeWithSelector(this.receiveLoan.selector, abi.encode(_repay_data))
    );
}

This function requests a flash loan from KeeperDAO’s LiquidityPool, passing encoded instructions for repayment via callback.

Step 2: Handling the Callback

After receiving funds, the pool triggers your contract’s callback:

function receiveLoan(bytes memory data) public {
    require(msg.sender == borrowerProxy, "Not borrower");
    RepayData memory _repay_data = abi.decode(data, (RepayData));
    IERC20(_repay_data.repay_token).transfer(liquidityPool, _repay_data.repay_amount);
}

This minimal implementation simply repays the loan. In real use cases, you’d insert arbitrage, liquidation, or collateral swap logic between fund receipt and repayment.

👉 Explore secure development environments for testing flash loan strategies.

Frequently Asked Questions (FAQ)

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—ensuring zero risk to lenders.

Why use interfaces instead of full contract code?

Interfaces reduce gas costs and improve security by abstracting external dependencies. You only expose necessary functions without duplicating code.

Can anyone trigger my flash loan contract?

No—functions like turnOutETH use the onlyOwner modifier, restricting access to authorized users only.

Is this contract safe for production?

While educational, real-world deployment requires extensive testing, audits, and integration with price oracles and slippage controls.

How do I test this locally?

Use tools like Hardhat or Foundry to simulate mainnet conditions, deploy mock tokens, and verify transaction flow before going live.

What happens if the loan isn’t repaid?

The blockchain automatically rolls back the transaction. No state changes persist, and the borrower pays gas fees for the failed attempt.

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Final Thoughts

You’ve now built a foundational understanding of smart contract development using Solidity. From defining interfaces and managing access control to executing complex DeFi operations like flash loans, each component plays a vital role in creating robust decentralized applications.

As you progress, consider integrating automated testing, formal verification, and multi-signature ownership patterns to enhance security and reliability.

Whether you're exploring arbitrage opportunities or building next-gen dApps, mastering these core principles sets the stage for innovation in Web3.

Core Keywords: smart contract, Solidity, flash loan, DeFi development, blockchain programming, ERC-20 interface, WETH conversion, contract security