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Flash Loan

An uncollateralized blockchain loan that must be borrowed and repaid within the same atomic transaction.

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Definition

An uncollateralized blockchain loan that must be borrowed and repaid within the same atomic transaction.

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Why it matters

DeFi concepts explain blockchain-based markets, lending, trading, liquidity, and financial automation.

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How it works

The user triggers a smart contract function that requests a flash loan. The contract sends the funds to the user’s smart contract, which then performs operations like arbitrage. At the end of the script, the contract checks if the borrowed amount plus fees are returned. If not, the transaction fails.

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Real-world example

Aave Flash Loans, used frequently for arbitrage and liquidations.

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Advantages

  • Zero collateral required
  • High capital efficiency
  • Enables advanced strategies

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Limitations

  • Requires advanced coding skills
  • Susceptible to flash loan attacks
  • High gas costs

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Common misconceptions

  • People think flash loans are for everyone, not just programmers.
  • Many believe they can run away with the borrowed funds.
Canonical knowledge ID: glossary:flash-loan