A flash loan is a way to borrow crypto funds from a lending pool without the need for collateral, provided the liquidity is returned before the underlying chain confirms transactions in the next block.
Flash Loans are therefore a form of unsecured loan used to fund complex chains of instant, programmed trades exploiting arbitrage within the DEFI ecosystem – price inefficiencies across tokens and other lending pools.
If the funds are not returned within one block, all the associated actions are reversed as if they never happened.
If the funds are returned within the space of one block then the lending pool the funds were borrowed from doesn’t lose out – because the funds are returned and they pocket a fee – and the person who took out the Flash Loan gets to keep whatever value they were able to generate across a complex series of transactions, net of the transaction costs associated with each step in the chain.
Now, this might sound like dark financial arts, but Flash Loans just apply the existing techniques that generate value within TradFi (investment banking and hedge funds), to the new world of DEFI (Decentralised Finance).
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