Flash loan is the kind of method in the crypto world that enable everyone to access a massive amount of capital and allow borrowers to borrow without collateralizing assets, because of these loans dependency on the Defi based smart contracts, not the third party but only the code guarantees the loan will be repaid within conditions which was already set up by developers in the smart contract, in case of the borrower fails to return the loan the actual transaction will be canceled in order to ensure the security of the agreement and funds.
The flash loan is the most exciting approach to gain unprecedented advantages, it is quite different from the centralized lending methods in which centralized exchanges always play the role of intermediary between borrowers and the lenders and loan usually matched and executed in the peer to peer manner, but decentralized lending is the exact opposite of the centralized lending, much of the lending occurred on the decentralized fund’s pools in order to match the transactions and needs for the borrower and the lenders.
The essential requirement of a flash loan is for borrowing and repayment to be completed in one block, otherwise, the transaction should be rollback, the entire flash loan process based on a smart contract, that will handle all kinds of arbitrage and transactions packaging.
Investors around the world use Flash loans for arbitrage, borrowing money, and wandering around between exchanges, due to the existence of many dex exchanges like Uniswap, these exchanges rely on arbitrage to keep the prices of cryptocurrencies from deviating too far from market prices.
Users use these loans to gain outstanding leverage for example if one user borrowed 10,000 ETH from any decentralized lending app through the flash loan scheme and use 5000 ETH to lend 112 wBTC at Compound, the other 5000 ETH to buy wBTC on a short-order at another dex app after these two steps again invest in short-order at Uniswap, the 112 wBTC which were received from the Compound and make the good profit in short positions, and finally, the borrowed 10,000 ETH amount returned to first dex application, in 3–4 steps the borrower gained enough profit.
The main goal of the Aave protocol is to provide the lightning loan to everyone who is interested in developing the lightning loan products, this will help developers and financial product designers to achieve the refinancing without the need for funds from other sources, the ultimate beneficiaries are the end-users because these products exclusively designed for end-users, these loans greatly reduce the demand of the funds as well as reduced the transactional cost.
Flash loan is the kind of smart tool that enables everyone to use the blockchain technology and do the arbitrage between different DeFi protocols in order to gain the maximum leverage, the flash loan allows users to lend crypto assets in the liquidity pool through the unsecured method, but users have to return the borrowed crypto assets at fixed borrowing cost after a series of swap mortgage liquidation operations, some time flash loan could trigger rollback because those loans don’t make money, but never affected the investor trust because the flash loan has zero cost and zero risks.