All you need to know about the DeFi lending phenomenon, Flash Loans
You are already quite familiar with loans in general. In order to take out a loan, you are normally required to provide proof of reserves, residence, identity, and income, bank statement, and you will have to answer a ton of questions regarding your purpose. The lender, being the bank, needs to know if you can provide collateral that is at least the same worth as your loan and you have to ensure them that you are fully capable of repaying the loan on time. Plus, it usually takes quite a while for the contract to get approved. But forget all that because that is not the case with flash loans. In fact, they are the exact opposite of ordinary loans.
Flash loans were first introduced to Marble -a DeFi open-source bank- by a forerunner in 2018 and arrived on the Ethereum network in January 2020 by the courtesy of Aave; the decentralized lending platform that was already issuing over $100 million in flash loans daily, by July of the same year.
Thanks to the innovative properties of Smart Contracts, flash loans occur in an instant; funds are both borrowed and returned in the space of just a few seconds, just like a simple transaction. Now, what do Smart Contracts do that makes this
possible? It is simple! They execute instant trades on behalf of the borrower with the loaned fund.
Considering the fact that a majority of loans, other than non-profit ones, typically charge a 0.09% fee, if the trade does not make a profit or if for any reason the borrower is not able to repay the borrowed capital, the arranged conditions in the flash loan Smart Contracts are not met, and therefore, the transaction is reversed, and the funds are returned to the lender as if it never happened.
What makes flash loans so special?
Flash loans reduce transaction fees by bundling several smart contract transactions into one and since traders are not necessarily required to risk their own funds, they can use flash loans to speculate on new coins. Another thing that has caught the interest of traders is that they benefit from arbitrage opportunities and can profit when a token’s value varies on different markets. After all, even a 1% difference can bring huge profits in a large loan used for arbitrage.
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