A flash loan is a type of trading where peole borrow an unsecured loan without an intermediary.
This is done through a smart contract which will monitor the transactions and ensure that the transaction happens when the user adheres to the rules given in the contract.
Basically, the user obtains the loan, uses it and repays it all in a flash.
A top lending protocol in DeFi, Aave, pioneers the smart contracts. The capital availability of the platforms that provide flash loan services determine the size of the loan. On Aave, these type of loans attract fees as low as 0.09%.
Flash loans are an avenue for making solid gains without having to risk all your money.
This is due to its unique attributes which include;
This means you can purchase use your flash loan to purchase a coin at a lower price and resell at a higher price on the same market.
You gain profits through the different prices across the various exchanges on the same market.
You can easily swap the collateral tendered on your flash loan with another one.
Quick & Fast
The smart contract involved in securing flash loans makes it fast and easy to perform trades
How flash loans work
First, the transaction is tendered or submitted to the network, lending you the funds temporarily.
Then you use the funds to do some stuff, but you have to make sure the funds are back in time.
If they’re not, the transaction is declined by the network, giving the lender their funds back.
This does not necessarily require any collateral from you because the blockchain secures the money and a code enforces the contract to repay.
The aim of flash loans is to make profit. When you obtain the loan, you are expected to include it in a smart contract, flip it for profit, and then return the amount borrowed after the transaction ends.
There are cases where flash loans are attacked by hackers. If malicious agents take large flash loans, they use them to manipulate the market and hack various DeFi protocols, take the profits at an expense of the investors and platform users.
However, these attacks can be prevented using either decentralized oracle or high-pricing frequency updates.
Decentralized oracle commits the data in the transaction to the blockchain. This prevents any form of manipulation from an outside source.
In high-frequency pricing updates prevents manipulation by constantly querying the liquidity pool of an oracle for fresh prices.
This technique helps to invalidates any manipulation on any of the previous prices. It is simple but also expensive.
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