In the crypto space, there are lots of crazy innovations, and one of them is flash loans.
Flash Loan allows you to take advantage of the market by borrowing any amount of crypto you want without putting up any collateral.
Imagine this scenario: you borrowed $100 million and made a $1 million profit without even putting up any collateral.
But what is this flash loan all about and is there more to it?
This article will teach you everything you need to know about it. But make sure you stay to the very end.
This is what I will cover:
What Is A Flash Loan?
How Does Flash Loan Work? How To Get A Flash Loan
What Are Flash Loans Used For?
NFT Flash loan
Flash Loan Risks
Let’s get started!
1. What Is A Flash Loan?
A Flash Loan is a Defi feature that allows anyone to take out a loan of any amount in crypto without any collateral.
However, there is one condition: the loan must be repaid within the same transaction.
A flash loan happens instantly, and loans are repaid in a matter of seconds.
Marble was the first to introduce the concept of a Flash Loan back in 2018.
But it was the Defi lending and borrowing protocol, Aave, that made it popular after adopting it in 2020.
billions of dollars in flash loans have been processed. Interesting!
How do flash loans work? Find out below.
2. How Does Flash Loan Work?
VIDEO This video by Binance explains how a flash loan works in layman’s terms.
A flash loan is made up of a series of transactions linked together by a smart contract.
Smart contracts are codes written on the blockchain that execute automatically when the rules that govern them are met.
This is a typical example of how a flash loan works:
A borrower takes out an unsecured loan from a liquidity pool – an unsecured loan requires no collateral
He uses the loan to perform certain transactions
After that, he takes out his profits and repays the loan.
Everything happens within one blockchain transaction
The smart contract ensures that these processes are carried out in just a single transaction.
Unlike regular transactions, which stall on the network and finish at a later time due to network failure, flash loans happen instantly.
If a transaction fails to complete, everything is reversed immediately, making it seem as if you never took out the loan in the first place.
This is how a flash loan works.
I discussed how you can get a flash loan below. Keep reading!
3. How To Get A Flash Loan
The first step in getting a flash loan is to have knowledge of what you want to achieve.
For instance, if you want to conduct Arbitrage trading with a Flash loan, you have to, first of all, discover an arbitrage opportunity.
The second step is to visit a flash loan provider.
Flash loan providers are platforms that offer flash loans as a service.
However, most of them require some coding knowledge to use, or you need to create a smart contract to use their flash loan feature.
For non-tech users, platforms like Furucombo or Defi Saver offer a simple interface to create flash loans.
I’ll show you how to get a flash loan using a platform called Furucombo right below.
1. Go to
Furucombo and click on “Launch App”. 2. Click on the wallet icon to connect your wallet.
Make sure you have some ETH in your wallet to pay for gas fees.
3. Click on “Create”
4. Click on the add icon on the cube and select “Flashloan” under Aave V2.
5. Select the coin you want to borrow, enter the amount and click on “Set.”
You’ll see 2 cubes added to the lego.
However, this is because it is a flash loan. The next Dapp you will add will only be a single cube. 6. Continue by adding other Dapps you want to use for the flash loan.
Drag and drop them in between the 2 flash loan cubes.
Also, make sure you arrange them in the right order
In this example, I got a 100 DAI flash loan from Aave and swapped the DAI to sUSD on Uniswap for a profit of approximately $22.
Then I swapped the sUSD back to DAI on Kyberswap and used it to repay my loan plus a $0.9 fee.
The reason is that Aave charges a flash loan fee of 0.09%.
Now, the rest of the money that I made becomes mine.
Other flash loan providers include:
The drawback, however, is that getting a flash loan from these platforms requires some coding knowledge.
Let’s find out what you can do with flash loans in the next section!
4. What Are Flash Loans Used For?
The following are some of the most popular uses for flash loans:
1. Arbitrage Trading
Arbitrage trading is a strategy that allows you to profit from the price discrepancy of an asset on different exchanges.
Now, remember the analogy I made earlier? Let’s see how it applies here.
Assume that the price of ETH/USDT on Uniswap and Curve is $100 and $101, respectively.
Using a flash loan, you borrowed $100 million in USDT,
Swapped it for ETH on Uniswap
And then swapped it back to USDT on Curve.
This nets you a $1 million profit, after which you repay your loan.
Interestingly, because it was a flash loan, you were able to make this large profit without using your own money.
2. Collateral Swap
This is something that borrowers in the Defi lending and borrowing protocols are familiar with.
A Defi lending and borrowing protocol like Aave allows you to get a regular crypto loan by depositing collateral.
For instance, to borrow DAI, you must deposit 82.5% of its worth in another asset, say ETH.
The catch, however, is that you must repay your loan before you can access your ETH.
Collateral swapping simply means that you are replacing your collateral with another asset.
So, why swap your collateral, you may ask?
A lender can decide to swap his collateral either for a profit or to hedge his funds.
Take this example:
You deposited ETH as collateral to borrow DAI.
After a few days, the market turns bullish on ETH, and you decide to trade your collateralized ETH for a profit.
But, you’re stuck because you’ve invested the DAI you borrowed into, say, fixed staking.
Gladly, all hope is not lost.
You can get a flash loan in DAI equivalent to the amount you borrowed, use it to pay off your loan, and then withdraw your ETH.
Trade your ETH for another asset, say, MANA, for profit.
You would then deposit the MANA token as collateral to borrow DAI and repay your flash loan.
3. Self Liquidation
This use case also applies to lending and borrowing in Defi.
Using flash loans, lenders can keep their positions on a loan even if their collateral is nearing liquidation.
Assume you borrowed DAI, using 80% of its worth in ETH as collateral.
You will get liquidated if your collateral drops to 85% except for two reasons:
Either you deposit more ETH to increase your collateral,
Or you pay back your DAI loan.
But let’s say your collateral dropped to 82% and you don’t have these two options handy.
You can use a flash loan as an alternative to avoid getting liquidated.
The following is what you can do:
Take out a flash loan in DAI
Repay your DAI loan and withdraw your ETH
Then swap enough ETH to DAI to repay your flash loan
Other use cases for a flash loan can be found
Continue to the next subheading!
5. NFT Flash Loans
Before now, flash loans were only possible in the Defi space.
Interestingly, today, Flash loan is now available in the NFT space.
This is possible because of what we now have as fractionalized NFT.
Now, you might be wondering what fractionalized NFT is.
Well, the concept allows NFT holders to lock their NFT into a smart contract vault, which converts them into fungible tokens.
In this way, anyone who buys those tokens owns a fraction of the NFT.
There’s a lot more to fractionalized NFT, but since it is not the topic of this article, you can learn more about it
As previously stated, fractionalized NFT allows anyone to write a smart contract that takes out an NFT flash loan. Mind-blowing!
The common use cases of NFT flash loans are arbitrage and claiming NFT rewards.
A practical example is the
story of a developer who used an NFT flash loan to claim $1.1 million worth of the APE token airdrop.
Platforms like NFT20, NFTX, etc. make NFT flash loans accessible.
Below, I talked about the risks of flash loans. Scroll down and read.
6. Flash Loan Risks
There are certain risks associated with flash loans that you should be aware of. See below!
1. Front run
Front-run happens when a trader exploits the market using inside information.
An arbitrage opportunity with a flash loan is a great opportunity.
However, there is a possibility that you will be front-run.
For instance, another trader can take an arbitrage opportunity from you by using a
flash bot to manoeuvre their transactions.
Sadly, if this happens, you are more likely to lose money.
Another example is the developer (already noted) who used an NFT flash loan to claim APE tokens that were not his.
He got ahead of the true owners of those NFTs, who have now missed out on their rightful rewards.
2. Network fees
Remember how I mentioned that if a transaction fails to execute, it will be rolled back instantly? Good
Now, with flash loans, you will have to pay transaction fees whether the transaction was successful or not.
3. Fake Smart contract
Most flash loan providers require coding skills, and scammers take advantage of this requirement to steal people’s money.
They do this by offering users a smart contract that has malware.
4. Flash loan attack
Flash loans are revolutionary, true! But they have also served as a threat to the Defi space.
flash loan attack happens when a malicious person uses a flash loan to steal investors’ funds in a liquidity pool by exploiting the bugs in a Defi protocol.
For instance, DeFi protocols such as Akropolis, Cream Finance, PancakeBunny,
etc were drained millions of dollars using flash loans.
We are almost close to the end of this article. Scroll down and we will call it a wrap.
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Flash loans have come as a great innovation.
Anyone can become a crypto whale with a flash loan.
Many crypto enthusiasts are making wealth out of it.
However, the bad actors in the space are using it for malicious purposes.
This article has now come to an end. I hope you enjoyed it.
I want to know your thoughts in the comment section.
Have you used a flash loan before or do you still have a question about flash loans? Share your thoughts with us.
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