Q & A

What is a flash loan?

DeFi / Mattison Asher Oct 12, 2020 1 Answer

0 / 1200

"The concept of a flash loan was first termed by Max Wolff, the creator of Marble Protocol in 2018." - Dragonfly Research, "Flash Loans: Why Flash Attacks will be the New Normal", Feb 27th, 2020

A flash loan is a loan that is paid back within the same transaction in which it was borrowed.

By checking whether or not a set of smart contract calls within a transaction will definitively return the money borrowed from the contract being flash loaned from, defi applications such as Aave, and Uniswap are able to loan money with no collateral, but risk-free while earning a guaranteed premium. [Source: https://docs.aave.com/faq/flash-loans]

This provides an enormous amount of "free" liquidity available to the market in a way unlike has ever been seen before in the traditional finance world that can be used to arbitrage tokens between dexes, free up collateral, rebalance leveraged portfolios on dApps, and many other things we have yet to dream up.

In short: A flash loan is a no-risk, zero-collateral loan available to anyone to take on a permissionless, decentralized, smart-contract based blockchain like Ethereum.


4