Flash Loan Definition
A flash loan is an uncollateralized loan in the DeFi (Decentralized Finance) sector that must be borrowed and paid back within the same transaction. If the loan is not paid back in time, the whole transaction is reversed to prevent any loss of funds.
Flash Loan Key Points
- Flash Loans are unsecured and taken within a single blockchain transaction.
- They are primarily used in arbitrage, collateral swapping, and self-liquidation.
- They can be effectively utilized only if the borrower can make more money with the loan than they have to pay back.
- If a flash loan can’t be repaid, the whole transaction is reversed to prevent any loss.
What is a Flash Loan?
Flash loans are a type of loan available in the Decentralized Finance (DeFi) sector, where one can borrow without collaterals. In this context, trust is replaced by the capability to repay the loan in the same transaction block.
Why use a Flash Loan?
Flash loans are used mainly for arbitrage, collateral swapping, and self-liquidation. They can yield substantial profit by leveraging price differences on different exchange platforms or swapping collateral in a lending protocol with other types of collateral when the prices are favorable.
Where are Flash Loans used?
Flash loans originated and are primarily used within the Decentralized Finance (DeFi) space. They are available in DeFi protocols like Aave and dYdX.
Who can use a Flash Loan?
While anyone can technically use a flash loan, they are best utilized by people with a deep understanding of the crypto market, especially DeFi protocols, to make more gains on the loan money within one transaction block than they have to repay.
When can a Flash Loan be used?
Flash loans can be used at any time when a user identifies an opportunity to leverage the borrowed money for profitable endeavors that can be completed within the same transaction block.
How does a Flash Loan work?
The user triggers a smart contract to borrow funds and to pay back within the same transaction block. If it’s not repaid, the entire operation is reversed, as if never happened. This happens automatically, eliminating the risk of loss due to non-repayment.
