Understanding Flash Loan.

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Hi friends! how are you doing? Welcome to my blog, it's super good to have you back here. I trust you got value from my last post. I bring to you another interesting content, one that I believe you would find interesting as usual. In my previous post, we explored the concept "Brave Browser", you can check out my blog to read through if you haven't.

Today, we would be looking at Flash Loans, what it is and how it works...it's actually another topic of interest I stumbled upon and felt like sharing with y'all. I hope you guys learnt one or two things from this write-up.

Introduction

The crypto and Defi world has been bringing really nice and innovative perspective to the financial realm. Defi made it possible to lend and borrow just like it's been done in the traditional financial system. This is even more beneficial than the traditional system of doing these things.

For loan to be disbursed both in the traditional and Defi world, there has to be collateral which help secure the whole loaning process should in case there is a breach in contract usually from the borrower.

In today's post, we want to look at something a bit different from the usual, a system where loan is borrowed without collateral. Is this possible? What is this system called? Well, I know this and many more questions are what you've got in mind. Let's look into it.

What Is Flash Loan

Flash Loans are types of loan available in the Defi ecosystem that gives borrowers an opportunity to borrow asset without collateral or a credit score but then the loan would have to be paid within the same transaction most times the entire process do not exceed minutes.

I believe it the reason behind the term flash, meaning something that doesn't linger for long. It's is quickly borrowed and returns as soon as possible withing a very short timeframe.
It has been discovered that flash loan is a viable way crypto trader and enthusiast take advantage of price changes in the market.

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Flash Loan are used mostly by smart traders to carry out arbitrage trading, liquidation and collateral swap.
It's important to mention that these kind of lending and borrowing process is powered by smart contract which facilitates everything and ensure that the contract is without breach.

Any breach from the borrower would make the lending process null and void, such that the loan will be automatically reverted and sent back to the pool where it came from. Repayment is suppose to be made with a little transaction fee and within a transaction opening window.

A quick glance at how Flash loan works

• Step 1: The borrower identifies a Defi platform that has the flash loan feature. We have quite a number of them which includes Aave, Furucombo, Equalizer Finance, Uniswap etc.
• Step 2: The borrowers initial the borrowing via smart contract.
• Step 3: The borrower connect his wallets to the Defi platform and get the smart contract activities to release fund.
• Step 4: The fund is released to the borrower after the third step.
• Step 5: Asset is transferred to the borrower which he in turns uses for other smart contract operations.
• Step 6: After use, the smart contract refund money back to lender. The amount is also verified by lender, if wrong, it would be reverted.

Risk of Flash Loan.

• Smart Contract Vulnerability
The success of flash loan depends largely on the use of smart contract, if there are bugs in it, it could affect the whole process and cause some serious problem.

• Slippage: This means variation in price, borrower could experience changes in price at the point of borrowing and could affect him when it comes to repayment because he might incure cost he didn't plan for.

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• Transaction Fee: borrower would have to pay for many transaction fee also known as gas fee as he interacts with different smart contract before he successfully carry out the lending and repayment process successfully.

Bottom Line

I believe by now you understand what the Flash loans are and how to use them to your advantage. As my usual custom is, I would always encourage that you DYOR to be sure of every financial step you would want to take as I won't be liable for any form of loss encountered by you.
Feel free to share with me your thoughts in the comment section. Thanks for your time once again. Gracias!

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^{Disclaimer: This post is made as an education and not investment advice. Digital asset prices are subject to change. All forms of crypto investment have a high risk. I am not a financial advisor, before jumping to any conclusions in this matter please do your own research and consult a financial advisor.}

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Regards
@lhorgic♥️

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