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A flash loan is a transaction in which a specific amount of money is borrowed and repaid in a short period of time.

What is Flash Loan?

This type of DeFi loan is known as a “flash loan” because it is processed, obtained, and repaid quickly without requiring collateral. Flash loans are a novel solution provided by the Aave platform and made possible by the Ethereum blockchain’s method of recording data.

The funds are borrowed and repaid at the same time, so there is no lag time. As a result, in order for flash loans to work, atomic composability is required, as everything must settle or fail simultaneously.

Because of the lack of credit or counterparty risk, no collateral is required for flash loans. As a result, because of their high leverage, flash loans are extremely capital-efficient. DeFi is the only place where capital efficiency of this caliber can be found; it cannot be found in traditional financial markets.

Aave and CREAM provide single-transaction loans that can be combined with other dApps like Uniswap or Sushiswap to make flash loans possible.

Flash loan attacks are a type of DeFi attack in which a bad actor obtains a flash loan through a lending protocol and manipulates the market in their favor using various black-hat techniques. Despite the fact that the transactions are swift, flash loans are not safe from exploits.

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