Once again, blockchain technology has found a way to make news. And to make profit.
To understand this trend, we need to start from the basics. Hence, what are flash loans?
A few explanations
They are loans done with cryptocurrency, specifically, on Ethereum. Technically, they are part of a larger movement called Decentralised Finance (DeFi). Indeed, the explanation is almost as complicated as the concept. So, let’s take a step back.
A definition of DeFi.
Of course, this form of finance is blockchain-based. The transactions don’t need any brokers, intermediaries, or exchanges. Through Decentralized Finance, users can lend and borrow cryptocurrency. Also, they can speculate on the prices, have insurance against any market risks, and create savings-like accounts.
The platforms that allow people to use DeFi are also called decentralized applications, aka DApps. Instead of financial intermediaries, the transactions happen between users. All of this thanks to a smart contract. Users trade digital tokens, sometimes providing liquidity to other people.
Now, time to define Ethereum.
A definition of Ethereum.
It’s an open-source blockchain that provides the option of smart contracts. Among the many crypto features of this platform, there is the DeFi option.
In fact, Ethereum has financial tools that allow users to trade and have loans. Without the government’s control and other regulations, decentralized finance also lets people earn interest. Plus, there are different platforms for DeFi, like Uniswap. This one allows for the exchange of tokens.
Finally, it’s time to introduce flash loans.
Flash loans 101
As CoinDesk explains, these loans are unsecured and instant. In fact, borrowers don’t need to put up any collateral. Instead, they need to pay the cryptocurrency right away. Hence, the instant part. The smart contract needs to be respected in the same transaction as the lender. So, the user asking for money has to perform instant trades to find the loaned amount.
You borrow and repay the amount in the same transaction. And there is no minimum or maximum amount. Can’t pay? The transaction reverses, as if the flash loan never happened.
What’s the point? The reasons for using this type of transaction is another financial concept: arbitrage. It’s time for an explanation, isn’t it?
A definition of arbitrage
These trades are simultaneous and they happen of different platforms. People making these transactions look at price discrepancies to make the exchanges. Those discrepancies (that happen at the same time and in different markets) are the profit.
When it comes to flash loans, arbitrage is useful because the borrower can do these transactions. Through them, the person can both find the money to repay the lender and make a profit thanks to the discrepancy.
Furthermore, flash loans have low transaction fees, always a bonus.
Users of the blockchain and crypto business are excited. Because, with this system, it’s possible to make money. For example, someone made $16,000 with no investment. How? It started with a loan of 2,048,000 USDCT.
Within the same transaction (or block), this user started swapping cryptocurrency. In the end, this person was able to repay the lender and make a profit. Thanks to the different rates and lending protocols. By analyzing the market and the platforms, the user made a real gain.
With the same knowledge and analysis, someone also made $30,000 in 30 seconds. So, yes. It is possible to make money this way. But there are risks.
Indeed, DeFi finance has its downsides. These are:
- Hackers’ attacks. The trading platforms aren’t 100% safe. These are not attacks on the blockchain, but on the DeFi softwares and programs.
- No regulations = no protection. These networks don’t have any capital reserves nor reimbursement. So, it’s trade at your own risk.
- To make any DeFi transaction, you need a crypt wallet. Often, these wallets require private keys, which can be long codes. Losing them means losing access to your account.
As with everything else, there are both risks and rewards. Informing is crucial to make the right decisions.
Flash loans are the latest buzz in the blockchain and cryptocurrency world. They can be a good way to earn money or to simply have the amount you need for your online shopping. It’s fast and innovative. Just like BitClout, another blockchain tool. What will be next in the crypto land?