What is Flash Loan


Aave was the first protocol in the crypto market to propose the "flash loan" concept. Flash loans allow users to borrow without any collateral. In this unsecured loan transaction, borrowing, and repayment must be completed within one block. Currently, the block time for Ethereum is approximately 12 seconds, so conducting all operations in such a short time is genuinely high-frequency trading compared to traditional loans, and that's why it's called flash loans.

The name relates to the book Flash Boys: A Wall Street Revolt by the American writer Michael Lewis. The book tells the story of a group of high-frequency trading firms on Wall Street that use high-speed computers/algorithms, and technical means to trade stocks in milliseconds and make huge profits.

Due to the nature of blockchain, transaction records within a block only become "verified facts" once they are packaged to the new block. If a user does not have a repayment record in the same block after borrowing, the former corresponding loan request is automatically canceled, and no actual borrowing behavior has occurred. 

This is why flash loans do not require collateral: if there is no repayment, the loan does not count, and the funds will automatically roll back to their original location.

The emergence of flash loans has made obtaining liquidity very low because only one gas fee and a 0.09% flash loan protocol fee need to be paid during the entire transaction process. It is, therefore widely used for arbitrage. 

However, as flash loans require all operations to be completed within one single block, ordinary users and manual operations cannot achieve this, and code is required to complete flash loan operations. Hence, the usage threshold is relatively high. In addition, not requiring collateral and flexibility of flash loans also makes them attractive to malicious actors, bringing some negative market sentiment to flash loans.



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