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Staggering interest rates, strange and irrational conditions for receiving loans, paperwork and dependence on a central financial institution, and worst of all, long periods of time to receive money; are just some of the problems with registering and getting loans from traditional banks and financial institutions. Yet, borrowing from a decentralized financial system with reasonable interest without the need for even a single dollar of collateral and most importantly receiving money instantly is not just a dream! An instant loan or Flash Loan in a Decentralized Finance ( DeFi ) without asking for collateral does not waste even a second of the user’s time.

The blockchain has always been promising in the global financial world, without the need for a central institution of power. This technology underpins the formation and flourishing of decentralized finance with smart contracts and decentralized financial applications that help people anywhere in the world benefit from any type of banking service without having to deal with complex administrative processes.

Peer-to-peer features and strong, transparent backing such as the Blockchain make these services distinct and superior to traditional financial services in many ways. One of the most widely used areas in the defense industry is lending platforms, which replace the tedious process of borrowing from traditional financial institutions with a few simple clicks.

The increasing development of blockchain technologies has made lending platforms more attractive to their users every day. One of these options is to be able to get an “flash loan” in the shortest possible time without the need for collateral. For more information about this type of loan, read this article from Coinmarketsig.com.

What is a flash loan or an instant loan in DeFi?

Flash loans allow digital currency users to receive millions of dollars in digital assets in a matter of seconds without the need for collateral. This process is completely decentralized and does not require special documents. Proponents of her case have been working to make the actual transcript of this statement available online.

The Marble Definition Protocol introduced the concept of instant loans in 2018; But its main reputation dates back to 2020, and it offers lending options through both the Aave platform and the dYdX decentralized exchange. It is interesting to know that in the last days of 2020, Avi was lending $100 million a day, and the total amount of loans offered on this platform by the end of 2021, reached more than $5 billion.

To better understand the reason for the popularity and popularity of Flash Lones, it is better to first look at the process of receiving traditional and defaults.

Traditional loans

Traditional loans are often offered under the supervision of banks and financial institutions, which are controllers and intermediaries between depositors and borrowers. In this case, the borrower must provide a certain asset to the bank as collateral in order to receive a certain amount of money. Also, these loans are generally associated with relatively high interest rates.

Although the system has provided funding and boosted the cycle of businesses and manufacturing companies over the years, problems such as banks’ strict criteria for customer authentication, the lengthy loan application process, and large interest rates on some loans (especially those with low collateral) have caused many Individuals and small startups are not eligible for a loan or receive it too late.

Lending in Defi

Distributed head office technology allows users to receive products and services such as digital loans in a decentralized and peer-to-peer manner. In diff lending instead of centralized financial institutions, we are dealing with intelligent contracts that work on the basis of algorithms and often provide the same financial services at the same interest rate to all users without the need for a complex process of customer identification and authentication.

However, due to the fluctuations of digital assets, most platforms require excessive collateral from the user to cover the risk in order to cover the risk, which can face the borrowing process with many risks and problems, especially for the borrower.

Flash loans in DeFi

Instant lending is a type of smart contract lending that some decentralized financial networks and protocols provide to investors. Instant loans are exactly the opposite of regular defaults and not only do they not receive excessive collateral, but they do not receive any “guarantee” from the borrower at all.

However, like any other type of loan, in instant loans the borrower has to repay the loan, except that the receipt and repayment are in a single transaction and are done in just a few seconds. If during this period, the borrower does not repay the principal, the conditions specified in the smart contract and the transaction will be refunded.

Key features of instant loans

By comparing the three types of loans we have described, we can summarize the basic features of instant loans in DeFi as follows:

No need for collateral

Most lenders ask borrowers to provide collateral to make sure they can get their money back on collateral if they do not repay the loan; however, it is not necessary to provide such proof in instant loans without collateral.

Of course, the lack of collateral does not mean that lenders cannot get their money back. Flash loan transactions through smart contracts guarantee the safety of lenders. Borrowers, instead of providing collateral, agree to repay the loan within a few seconds, otherwise the transaction is reversed; just like the borrowing process is not done at all.

based on Smart contracts

The mainstay of instant loans is smart contracts; these contracts ensure that no cash will be received until certain laws are enforced. These rules do not include receiving collateral, checking the borrower’s credit or similar processes; Therefore, the borrower can easily get large loans without having the initial capital.

However, the terms of these smart contracts require that the entire loan process, use, and repayment be done in a single transaction. In the Ethereum network, each transaction takes about 13 seconds; so we only have a few seconds between receiving and paying instant loans on the Ethereum network. If during this period, the borrower does not repay the principal, the conditions specified in the smart contract and the transaction will be refunded.

In practice, even if the borrower does not receive a guarantee, under the terms of the smart contract, not repaying is tantamount to not receiving a loan. Therefore, getting an instant loan poses little risk to both the lender and the borrower. The borrower does not need the initial capital and the lender can be sure that he will receive the loan repayment.

Delivery in the shortest time

Getting a loan is usually a long process, and eventually, if the borrower is approved for a loan, they will have to repay it continuously over months or years. Yet, the loan is repaid and repaid immediately.

What are the uses of an Flash Loan?

You’ve probably wondered what it would be like to get a loan in just a few seconds. Here are some common methods that are currently used by instant loan borrowers.

Arbitrage

Arbitrage is the main way to make a profit from instant loans. In this way, traders can earn money by using price differences in different exchanges. Suppose a certain currency is traded for $1 in exchange A and $2 in exchange B. In this case, you can use the instant loan to buy $100 of this coin from exchange A and sell the same amount in exchange B for $200. Then you repay the loan and put $100 in your pocket.

It should be noted that these loans, in addition to not requiring collateral, do not have a high fee. For example, the AVI platform deducts only 0.09% of the total loan amount as a fee. Therefore, we can now consider the most important application of instant loans to be the multiplication of profits in digital currency transactions.

Exchange of collateral

Collateral Exchange is the rapid exchange of the collateral of a loan for another type of collateral. Because the assets pledged in DeFi are subject to price fluctuations, there is a possibility of liquidation and loss of initial loan capital. Instant loans help users quickly close a collateral position and immediately open a new collateral position with different assets. Although this method does not have much potential for profit, it is a good tool to facilitate the DeFi borrowing process for professional traders.

Reduction of transaction fees ‌

Another benefit of getting an instant loan is the savings in transaction fees. Flash loans support several different financial processes that normally need to be done in multiple transactions in a single transaction. As a result, the user can make several profitable transactions with just one commission.

Solvency

Suppose you receive a loan with an interest rate of 10% from Platform A and then you find that Platform B offers the same loan at an interest rate of 5%. In this case, by receiving an instant loan, you can pay your debt on platform A, release your collateral and immediately get another loan on platform B, and repay the flash loan.

You can also use these loans to release other loans. Simply take a flash loan, pay off your mortgage loan, get the collateral and repay the flash loan with it, and then take the rest of the collateral for yourself. As you can see, there are many ways to use instant loans. However, obtaining, using and repaying these loans is very complex and requires high technical knowledge and complete market information.

What are the advantages and disadvantages of Flash Loans ?

A close look at Flash loans at DeFi clearly shows how this type of loan can be used as one of the most important strengths in increasing the acceptance of digital currencies. However, some of the biggest strengths can sometimes become the most significant weaknesses. Flash loan transactions also have distinct principles and features that, in addition to being superior to this type of loan, can be quite risky in some cases.

Receiving instant money

Sometimes the tedious process of filing a traditional loan application takes so long to receive it that the borrowed capital actually loses its effectiveness. In the case of DeFi loans, due to the sharp fluctuations of the crypto market, excessive collateral, interest and long repayment period of the loan in many cases eliminate investment opportunities. However, flash loans are available to users at the moment and if used properly, provide a very high profit potential for the trader.

Make a profit without the need for initial capital

Instant loans and the arbitrage opportunities they create have almost the same leverage as transactions. Mortgages without the need for collateral help the borrower maximize their profits, an opportunity rarely seen in other traditional and digital financial services. If the user has sufficient technical knowledge and high speed in performing financial transactions, he can make a significant profit without the need to lock in capital and take risks.

Requires a lot of technical knowledge

Although the terms, benefits, and uses of flash loans may seem tempting, they are a very complex process. At first, only developers could use instant loans who had a thorough knowledge of Ethereum and how to write smart contracts on the network. In fact, to get these loans, the developer must first create a smart contract on the blockchain to submit a loan application, and to do so, sufficient knowledge of Ethereum’s programming language, Solidity, is required.

There are also platforms that claim to provide instant loans without programming knowledge. However, currently the complexity of these loans and the lack of a simple user interface may cause problems for less professional users.

Risk of hacking lender platform

Instant loans are still in their infancy, and this fledgling technology could lead to safety and practical problems. Although the main strength of flash loans lies in the operation of smart contracts and price oracles, this can be the biggest weakness for flash loan transactions. Smart contracts are vulnerable to flash loan attacks. If these contracts are not made properly or receive incorrect data, they can be hacked and misused.

In fact, instant loans have often made headlines due to the manipulation of “hackers”. The first hot news of Flash lending came in February 2020, when the bZx lending protocol was attacked twice in just one week by FlashLone, which lost a total of about $1 million in digital currency. In the first attack, a borrower manipulated the market defense in a very complex operation using a few different protocols in a matter of seconds, and in the second attack, the borrower temporarily increased the price of the stable coin used for repayment, this time by performing smart contracts and price oracles. Targeted and stole a large amount of ether.

Similarly, between October 2020 and May 2021, hackers exploited the instant lending option on PancakeBunny, Alpha Finance, Spartan Protocol, Harvest Finance, and Harvest Finance platforms. They stole $171 million!

The fact is that the problem is not with flash loans; Vulnerabilities that were exploited are present in other protocols, and flash loans only covered the cost of the attack. Since this type of theft is extremely cheap, it does not require much investment from the attacker and there is no financial deterrent.

DeFi

How to get an flash loan?

As mentioned earlier, the best way to get and use an instant loan effectively is to write an Ethereum-based smart contract using solidity language. For this purpose, you can use AVI, dYdX, compound and ion swap platforms. These platforms differ in terms of access to different digital currencies, complexity of operations as well as transaction fees.

For instance, the AVI fee is 0.09% and the dYdX platform fee is zero; However, AVI allows the user to access a variety of digital currencies, while dYdX is only suitable for Ethereum, Dye and US Coin loans.

In addition, platforms such as Collateral Swap and DeFi Saver also offer users the option of flash loans. The Frucombo platform also allows the user to borrow instantly without the need for coding knowledge. However, this platform is also a complex process and is not suitable for new users.

In fact, to use the FerroCombo platform, you need to have the skills to arrange several different operations in a single transaction, so that you do not end up in debt. In addition, platforms such as FerroCambo, which offer instant lending without the need for coding, often have limited access to digital protocols and currencies, greatly reducing the user’s discretion.

Right now, the best way to get flash loans is to master the language of solidity programming, coding smart contracts and of course complete information about market fluctuations, and in general we can say that flash loans are not suitable for all traders at the moment.

Flash Swap: Instant Ion Swap Loan

The UniSwap platform also offers its Flash loan version in the form of “instant swap” or “Flash Swap”. Unlike other transactions in UniSwap, where you must first send deposit tokens for exchange, in “Flash Swap” you can withdraw tokens first, similar to Flash loan. If you cannot make a deposit within a few seconds, the entire transaction will be refunded.

In other words, Flash Swap allows you to pick up Ethereum-based tokens at no cost, provided you eventually either pay for the tokens removed or return the tokens with the corresponding pair. Of course, in the meantime, you should also think about paying the transaction transaction fee.

For example, you can withdraw a token from the Rapdater / Dai (wETH / DAI) liquidity pool; Use any arbitrage logic you want to make a profit, and finally, in addition to the 0.3% transaction fee, repay the same amount of DAI or the equivalent of wETH.

In conclusion

Instant or immediate loans on DeFi can provide millions of dollars of money to traders without the need for collateral and with just a few lines of code. Perhaps, as some believe, they will lose their reputation with the evolution of instant loan defenses, and perhaps by designing safer protocols, they will be able to allow people to be a crypto whale in a completely decentralized manner, even for a few seconds, without any initial capital.

Overall, although the use of flash loans is currently quite limited, this type of financial service can pave the way for the creation of a wider range of financial applications with new features in DeFi. In fact, given their potential, these loans can play a decisive role in shaping the future of defense. Unsecured instant loan facilities, along with the use of smart contracts, can showcase a variety of opportunities for the growth of a completely new financial system.

However, it is also important to note that the concept of instant loans in DeFi is still in the early stages of development and is not currently suitable for many traders due to its technical complexities. In addition, the ongoing hacks and cyberattacks that have taken place on instant loan platforms over the years show the immaturity of this decentralized financial space. In general, we suggest that before you invest your money in any area of ​​DeFi, make sure you fully understand the risks and consider the appropriate risk coverage for the safety of your capital.