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Flash loans, the future of finance
What if I told you you could take a loan of any amount with any credit ranking, collateral, or background check. You could use it for whatever you wanted and pay me back. If you think there is a catch. Then you’re right, here’s the catch, after taking the loan you’ll have to do everything within 10 seconds within which the loan must be paid back. Sounds impossible right, and it is with regards to our current financial systems.
However, the world of the blockchain makes this possible by creating a financial instrument called a flash loan. Why pay the loan back, you can decide not to and run away to the Himalayas and no one would find/ hire an entire army that the money would pay for to protect you from any danger/arrest since you can technically borrow any amount. However, this won’t work because flash loans work in a unique way that eliminates fraud. And here is how
A loan is taken from a liquidity pool and given to the borrower in a single transaction block. The borrower must make transactions in the same block and return the loan(usually with interest) in that very block as a single transaction. Here’s the sweet deal if a single stage of the process fails, the transaction would appear to never have happened. To make this clearer, if the borrower refuses to pay the money, the blockchain ceases to recognize the loan issued, the items bought/ transactions made with that loan, and the entire series of transactions forming one transaction is never added to the block(a record). So it’s like the transaction never existed in the first place. Everything is reverted to the point before the transaction was initiated.
There is simply or almost no risk or need for trust on the side of both parties when it comes to flash loans. The lender is guaranteed 99.99% repayment and the borrower does not have to worry about defaulting. No need for complex crediting scoring systems when it comes to flash loans, the loans would always be repaid. All this is made possible by smart contracts, and powerful programs that live on the blockchain.
So what exactly have you accomplished with a loan you have to pay back within 10 seconds. Well, I got one answer for you arbitrage. You can buy from one market and instantly sell the stuff you bought for a profit in another market or the same market. In this case that could be a share, security, or cryptocurrency. The good thing about this is that you can ensure that if the required profits are not earned the transaction is immediately reverted.
Flash loans are a new financial concept and the possibilities are endless. They would change the trajectory of financial systems and bring a lot of ease to loan-financed transactions.