In regular loans, the lender usually wants some kind of collateral to make sure they get their money back; the contract often takes a while to get approved, and the borrower pays back the loan, with interest, over a period of weeks, months or years. Flash loans are the opposite of that. They do what they say on the tin, and occur in an instant because the funds are both borrowed and returned within seconds—in the space of one transaction. If the borrower doesn’t repay the capital, or the trade doesn’t make a profit, the conditions set out in the flash loan smart contract aren’t met, and the transaction is reversed—just like it never happened, with the funds returned to the lender. So—in theory, at least—there’s minimal risk for both parties.
There are several benefits in doing so:
- Lot of assets become available to flashloan from which makes DeFi ecosystem safer and more robust
- Venues for flashloanable assets increase
- Compound users earn more interest from fees