Flash Loans In Decentralized Finance - Explained

 In this article, we may discuss Flash Loans, a nascent entry into DeFi Space. This flash loan opens up a world of possibilities for a new financial system. The Concept of Flash Loans - "Uncollateralized Loans" has made a lasting impression.

What Are Flash Loans in DeFi?

Flash Loans in DeFi are lending with no collateral that is powered by decentralized finance protocols. Flash loans assist in borrowing any assets or amount without any collateral that depends on returning the liquidity to protocol within the duration of the block’s transaction.

Flash Loans lets anyone borrow an unguaranteed amount with rules to pay back within the same block transactions. If it is known that the person who takes a flash loan will not be able to repay it within the same block, then the loan process will be reversed & will be that it never started. These flash loans are famous for the DeFi Protocols running on the Ethereum blockchain network.

How Does A Flash Loan Work?

A flash loan must be repaid within the same block transaction. 

If you know about Ethereum, you know that the platform is pretty flexible, so people call it programmable money.

In the case of a flash loan,  the transaction program is being made up of three parts:

Receive the loan

Do something with the loan

Repay the loan

It all happens in a flash.

The transaction gets submitted to the network, which lends you that funds temporarily. 

You can do whatever you want as long as the funds are back in time for the third step. 

If not, the network rejects the transaction, meaning the lender gets their funds back. 

As blockchain is concerned, the users always had funds. This explains why the lenders do not require collateral from borrowers.

Flash Loan Attacks

In 2020, $1,000,000 in value attackers saw with two high profile flash loans.

First Flash Loan Attack - The borrower took out an Ether flash loan on dYdX. Then divided loan & sent to Compound and Fulcrum

Are Flash Loans Risky?

The particular attack vector is impressive as it showcases how far attackers can go. 

In all-flash loan attacks, it all happened because of the problems with other protocols and not because of the flash loans. Thus flash loans are free of vulnerabilities and attacks. Thus this form of DeFi lending has many interesting use cases in the future with less risks for both lenders and borrowers.

Know more about Flash Loans here -> What are Flash Loans In DeFi?