Flash loans as its name suggests are literally loans that can transpire instantly. Put literally, imagine we you could borrow millions of dollars, but you had to pay it all back in just a few seconds? With flash loans this can be done with absolutely no collateral. Sound too good to be true?
If you are thinking we are a few short sandwiches short of a picnic, allow us to introduce you to the world of flash loans.
Flash loans, to put it in simple terms, is a loan in which someone can borrow massive amounts of money for free with the only requirement being that he or she must pay it back almost immediately.
The process is accomplished by employing smart contracts and their code will have a computer verify if all transactions check out and, of course, whoever is borrowing the money is in condition to pay it back.
So, if you take out a million dollars and repay it in the same transaction, since the initial state is maintained, no one seems to mind, and this is pretty much how flash loans came to be. Flash loans have proven to shore up some obvious weaknesses in traditional loans as well as decentralized finance (DeFi) loans.
By the end of things, if every validation goes through and gets approved, voilà: you have successfully borrowed millions of dollars to do your thing.
Who Approves Flash Loans?
Naturally, you might be questioning why on earth would anyone want millions of dollars for only a few seconds?
Well, the answer is simple: there’s money to be made. Let’s look at how things were done in the early days and how flash loans can also mean big money.
Introducing Trading Arbitrage
Trading arbitrage
