Flash Loan

Flash loans are a relatively new type of unsecured lending in the world of decentralized finance. Originally pioneered by Aave in early 2020, it has since grown in popularity and is available in many lending protocols.

Many crypto industry experts have become sincere advocates of flash loans, as they offer innovative ways to arbitrage, execute fast transactions, and offer many other novel features previously unavailable in traditional finance.

Most of us are familiar with traditional loans, where a lender lends money to a borrower and then repays it over a fixed period of time at a fixed premium or interest on top of the principal. Flash loans share the same basic principles, but include several unique features:

This is an unsecured loan, which means that the borrower does not need to use any assets or deposits to get the loan. Also, unlike traditional unsecured loans, there is no credit check process.

All flash loans are done through smart contracts on the blockchain and stipulate that if the borrower does not return the funds in a single blockchain transaction, the loan process will be reversed as if it never happened. This key difference is why borrowers are able to get a flash loan without any collateral or credit checks, as it removes any risk from the lender.

The loan process is instant, so once the loan is extended, the borrower must invoke other smart contracts to utilize the flash loan to attempt to execute the transaction almost instantaneously, and then return the funds before the end of the single block transaction, usually within seconds.