Flash loans allow you to borrow assets in a liquidity pool without providing collateral. Such loans can be used to move collateral on the platform, however, their main use is in arbitration.
In the first nine months of 2020, users of the Aave DeFi platform were issued almost half a billion dollars ($ 498 million) in flash loans. The latter is popular among traders as they allow them to conclude large transactions without collateral.
Flash loans allow the user to borrow up to the full amount of free liquidity under the unsecured lending protocol, and then use the resulting assets for other transactions. The commission for using such loans is minimal (in the case of Aave – 0.09%), provided that the client has time to return the assets within one transaction block.
If the borrower is unable to repay the debt within the specified time, no transaction will be executed. For the Ethereum network, in which Aave operates, the transaction block generation time is about 30 seconds.
Flash Credits can be used to move collateral across the platform, however, the most common use for them is in arbitrage opportunities. A user buys an asset at a low price in one pool, immediately selling it at a higher price in another. Usually, arbitrage is demanding on the capital reserve, however, flash loans can solve this problem.
Note that flash loans provide a wide range of opportunities not only for respectable traders but also for hackers who have repeatedly used this functionality to hack DeFi protocols. For example, in February 2020, criminals used a vulnerability in flash credits bZx to withdraw $ 350,000 from the protocol. A few days after the incident, bZx was attacked again – through “manipulation with the oracle”, hackers removed another $ 640,000 from the protocol.