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What are Flash Loans In Decentralized Finance? - A Quick Note

An exclusive guide that explains the concept of flash loans in decentralized finance (DeFi).

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What are Flash Loans In Decentralized Finance? - A Quick Note

The use of cryptocurrency has made many think about the reshaping of the traditional financial system. 

In this article, we may discuss Flash Loans, a nascent entry into DeFi Space. This flash loan opens up a world of possibilities for a new financial system. The Concept of Flash Loans - "Uncollateralized Loans" has made a lasting impression.

Let's dive in !!

What are Regular Loans?

Secured Loans

Secured loans are ones which require collateral submission until the repayment of loans by the borrower.

Unsecured Loans 

An unsecured loan is a loan where the borrower does need not put forward any collateral for processing.

Regular loans will take time to process and thus with decentralized finance flash loans this loan process is made easy. 

What Are Flash Loans in DeFi?

Flash Loans in DeFi are lending with no collateral that is powered by decentralized finance protocols. Flash loans assist in borrowing any assets or amount without any collateral that depends on returning the liquidity to protocol within the duration of the block’s transaction.

Flash Loans lets anyone borrow an unguaranteed amount with rules to pay back within the same block transactions. If it is known that the person who takes a flash loan will not be able to repay it within the same block, then the loan process will be reversed & will be that it never started. These flash loans are famous for the DeFi Protocols running on the Ethereum blockchain network.

How Does A Flash Loan Work?

A flash loan must be repaid within the same block transaction. 

If you know about Ethereum, you know that the platform is pretty flexible, so people call it programmable money.

In the case of a flash loan,  the transaction program is being made up of three parts:

  • Receive the loan
  • Do something with the loan
  • Repay the loan

It all happens in a flash.

The transaction gets submitted to the network, which lends you that funds temporarily. 
You can do whatever you want as long as the funds are back in time for the third step. 

If not, the network rejects the transaction, meaning the lender gets their funds back. 

As blockchain is concerned, the users always had funds. This explains why the lenders do not require collateral from borrowers.

Flash Loan Attacks

In 2020, $1,000,000 in value attackers saw with two high profile flash loans.
First Flash Loan Attack - The borrower took out an Ether flash loan on dYdX. Then divided loan & sent to Compound and Fulcrum

Are Flash Loans Risky?

The particular attack vector is impressive as it showcases how far attackers can go. 
In all-flash loan attacks, it all happened because of the problems with other protocols and not because of the flash loans. Thus flash loans are free of vulnerabilities and attacks. Thus this form of DeFi lending has many interesting use cases in the future with less risks for both lenders and borrowers. 

Properties of Flash Loans

Some of the unique properties of Flash loans include the following:

Smart Contracts

Smart contracts are blockchain-based contracts that execute fund exchanges until certain criteria get satisfied and are utilized in flash loans. Here the borrowers should return the flash loans before the transaction ends or this smart contract reverses the transaction which makes it as if the loan never happened.

Instant Lending 

The process of obtaining and repaying a loan can take more time and will be a lengthy procedure, and thus borrowers repay the amount of loan over a period of time.
On the other hand, this flash loan is immediate. Here both parties must meet the flash loan's smart contract with the loan's payout. 

Within a few seconds, before the trade expires, the borrower should invoke another smart contract for making transactions with loaned cash. 

Unsecured Loan

In secured loans, borrowers need to deposit collateral to lenders in order to reclaim their money if the borrower fails to repay the loan. On the other hand, unsecured loans will never demand collateral from borrowers.

The lack of collateral is not the reason for the borrower's inability to repay the flash loan. The borrower must return the loan amount rather than handle collateral.

Benefits of Flash Loans 

Flash loans are completely permissionless, which means that it does not require anyone's approval or verification for processing. Anyone with a computer & WiFi connection can access capital as banks or professional traders. 

Listed here are some of the advantages of Flash Loans :

Zero Risk Lending

A borrower of any assets may not be able to repay the standard loan which is referred to as default risk. The nature of flash loans ensures that it will be repaid as the loan is risk-free. Thus flash loans allow everyone with assets to lend, putting the resources to be productive rather than being unused.

Better User Experience

Repaying a Collateralized Debt Position (CDP) in MakerDAO, is a two-step process.
The user should first get DAI to repay the loan and redeem their own collateral.  Each step after the first brings complexity and expenses which makes transactions more difficult. 

Thus, Flash loans solve the issues directly by combining many transactions into a single transaction.

Huge Capital Efficiency

In the traditional banking system, obtaining a loan needs a deposit of any form of security.
Many DeFi methods require borrowers to put down their collateral which is more valuable than their loan. This restricts most financial services and also the size of potential opportunities for a borrower. Flash loan removes the default risks and no collateral is needed for processing loans.

Execution of Flash Loans Using Ethereum Smart Contracts

Mentioned here are the steps that help you execute the flash loan using a smart contract on Ethereum.

Step 1: Write, debug and deploy the solidity smart contracts using Remix Setup which is a browser-based IDE. 

Step 2 : Then, download Metamask for your browser extension that helps to interface with the Ethereum platform. Create secure password & write down mnemonic seed phrases.

Step 3 : Now it's time to write the solidity smart contract and store it in the .sol extension. When it comes to flash loans, you need to create various files such as flashloan.sol, flashloanreceiverbase.sol, ilending,withdrawable.sol and more.

Step 4 : Now open your MetaMask & set your network to  Kovan Test Network. Now define the dependencies of flash loan smart contracts and switch to the solidity compiler tab 

Step 5 : Switch to deploy & run transactions page. Click on the deploy which will open the metamask & then press confirm. Now you can see the deployed contracts button on the side panel.

Step 6 : Now finally fund the flash loan from MetaMask & execute it by going back to Remix.

What Bitdeal Can Afford You In Integrating Flash Loans?

We Bitdeal - Leading DeFi Development Company offers DeFi Protocol and decentralized finance platform development along with the integration of flash loans. We also provide a separate solution for the integration of flash loans modules into your already existing DeFi Platform or system. 

Here are some of the services that Bitdeal can assist you in integrating flash loans in your business system. 

Smart Contract Development

Our developers develop blockchain smart contracts for the execution of flash loans.This solidity smart contract automates the flash loans & also specifies the execution terms.

Wallet Development & Integration

We create DeFi wallets for flash loans processing which is a non-custodial decentralized wallets.Then our experts integrate MetaMask into the created wallet or already existing wallets. With this DeFi Wallets can enhance security & fast lending.

Maintenance Support & Upgrade

We monitor,maintain and upgrade the existing DeFi wallets for future innovations and also for current bugs and make wallets more productive. 

DeFi App Development

Our DeFi Experts can develop applications for decentralized finance processing on a P2P Ecosystem by giving control to node consensus & by eliminating intervention for execution of flash loans.

Want to integrate flash loans into your DeFi System? Contact Bitdeal's DeFi Experts now !!

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