Flash Loans: DeFi Instant Loans

By Simplify Crypto | Simplify Crypto | 20 Sep 2020

The financial system is being practically redone within blockchains.

In a short space of time, a decentralized finance system has implemented new uses for the blockchain ecosystem, and is increasingly providing options for cryptocurrency trading.

The DeFi protocols introduced yield agriculture (Yield Farming) and liquidity mining (Liquidity Mining) to the world, and has been developing another form of investment called Flash Loans (Instant Loans).

In the world we live in, a person can ask a relative or acquaintance for a financial loan without proving that he has the means to pay later.

You can also request a loan from a Financial Institution and it will investigate your supposed conditions of paying later, whether or not you can assign the loan or restrict its value.

In these two examples the person applying for the loan does not need to give guarantees that he is able to return the loaned amount later; you should just do it.

On the other hand, there are those cases in which the applicant needs to leave some guarantee to the lender, because in the case of a failure to settle the loan, this guarantee will serve as payment.

However, in the three cases mentioned above, if the borrower is in default he will give the lender a little work to receive his rights, which may take months or even years in court depending on the case.

This is where instant lending comes under DeFi protocols.

In them, the lender does not need any information or equity assessment from the borrower. You just need a smart contract within the Ethereum network.

This is how it works: The creditor makes his Tokens available to the requester and a smart contract is created.

When the applicant makes any transaction with these borrowed Tokens, the smart contract will automatically be terminated and the amount will be returned to the creditor.

If the applicant does not carry out any transaction, the contract will quickly expire and the amount borrowed will also be returned to the creditor.

In both cases, a commission will be paid to the lender who lent your cryptography to the DeFi instant loan protocol.

It should be noted that the only reason for taking an instant loan is to make a profit.

In any other type of loan the applicant can do whatever he wants with the money, but in this case, no, as the contracts have a very short term.

Usually Flash Loans are used in arbitration processes, which is a type of business where the difference in prices between the same asset on different exchanges is used.

Sometimes this price difference can be significant to the extent that an investor buys cryptocurrencies at one exchange and sells at another and makes a profit from it.

In the past, this type of investment was more profitable, since the price difference of two assets in different exchanges could be large.

Currently, this occurs more with cryptocurrencies that have low liquidity, or exchanges that have low trading volumes.

As well as, normally, in this type of loan the financial volumes applied are usually higher, due to the relatively low percentage of profit or volatility within a short period of time.

Furthermore, we cannot disregard the transaction fees and interest rates of this type of investment, which makes it even more risky.

The possibility of quick loans has also aroused the interest of criminals who have already used protocols such as bZx's Fulcrum to make attacks on the network by deceiving the system and taking great advantage from it.

From the current perspective, instant loans are not very common and carry great risks, in addition to being liable to criminals who can harm a certain network of Flash Loans.

Currently, the main DeFi protocols that offer instant loans on its platform are Aave, Maker and Compound.

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Simplify Crypto
Simplify Crypto

Trying to help people to understand the crypto world from the basic concepts to the crypto projects purpose. My articles are publish in Publish0x and Hive

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