Flash loans are a form of uncollateralized lending system popular among decentralized finance (DeFi) networks. The lending system uses a smart contract that allows loans to be granted, utilized, and paid back in one transaction by borrowers.
The following properties distinguish flash loans:-
Smart contracts: Smart contracts, which are blockchain-enabled mechanisms, are used in flash loans to prevent funds from changing hands unless certain conditions are met. In the case of a flash loan, the borrower must return the loan before the transaction expires, or else the smart contract cancels the transaction, making it look like the loan never happened.
Unsecured loan: In traditional loans, lenders usually demand borrowers provide collateral to ensure that they can reclaim their funds if the borrower defaults. Unsecured loans, contrarily, do not demand collateral. In spite of the lack of collateral, lenders have an assurance that their funds, due to borrowers paying back their loans instantaneously.
Instant: A traditional loan's full process can take weeks, months, or even years in some situations. A flash loan, on the other hand, is available immediately. Because the smart contracts for a flash loan must be completed in the same transaction as they were given out, any need for another trade means the borrower will have to use other smart contracts to execute it.
Flash loans can be used to fund the following purposes:
Arbitrage is the practice of profiting from price differences between two or more markets for an asset. Traders can profit by identifying price discrepancies across a variety of exchanges.
For example, if two markets price a cryptocurrency differently, DEX A's price is $2 and $2.50 on DEX B. A trader can use a flash loan to call a separate smart contract to purchase the $200 value of the coin on DEX A, then sell the coin for $250 on DEX B. The trader has made a profit of $50 and can then repay the flash loan.
This entails a quick exchange of the collateral, securing a user's loan for another type of collateral. DeFi users can use collateral swaps to change the collateral they used to get a flash loan on a lending app.
For example, if a trader utilized Ethereum (ETH) as collateral on Aave, they can take out a flash loan to repay the prior loan and withdraw their Ethereum (ETH).
Aside from collateral swaps, flash loans can also be used for "liquidations." The loan can be used to prevent the automatic liquidation of a trader's lending positions or can be used by a liquidator to trigger the liquidation process of another DeFi trader's portfolio.
For example, if a trader uses ETH as collateral on dYdX and approaches the liquidation threshold. The trader can self-liquidate by initiating a flash loan, using the flash loan to close the collateralized loan on dYdX. The trader will then swap a portion of the collateralized asset (ETH) for the asset needed to repay the flash loan provider. Terminating the flash loan and keeping the rest of the collateral (ETH).
For a liquidation scenario, a liquidator can initiate a flash loan to liquidate another user's account by triggering the liquidation process, which includes repaying the collateralized loan on behalf of the borrower and retrieving the collateral with a liquidation bonus from the DeFi platform.
The transaction fee is reduced because a flash loan combines several transactions into one. The transaction costs are subsequently added to the loan amount, resulting in cheaper fees for the borrower.
To acquire a flash loan, you need to consider several factors such as gas efficiency, easy-to-use interface, and loan fees. Flash loans can be acquired from flash loan providers such as Equalizer.
Flash loan providers, also known as flash loan protocols, are DeFi-based platforms that make loans available to users in a trustless manner.
These providers are funded by a liquidity pool built on a smart contract that allows cryptocurrency holders called liquidity providers (LP) to send coins they want to lend into the pool. In exchange for providing their coins, the liquidity providers earn fees from the transactions in the pool. Once the coins have been added to the pool, they are available for borrowing by other users. From start to finish, the entire lending procedure is completed in a single transaction with no intermediaries.
While the conception of flash loans is gaining popularity in the cryptocurrency world, not all DeFi trading platforms offer them to traders. Here are a few DeFi platforms from which traders can obtain flash loans:
Equalizer: Equalizer is a DeFi protocol that serves as the first dedicated flash loan marketplace to provide loans that meet the growing demand for DeFi borrowing and lending.
Aave: Aave is a DeFi protocol that allows users to lend and borrow cryptocurrency without a centralized intermediary. The users earn interest when they lend and pay an interest fee when they borrow.
dYdX: The dYdX protocol is based on Ethereum, allowing lenders and borrowers to engage with the lending pool through Ethereum smart contracts.
Uniswap V2: Uniswap is an automated liquidity pool built on Ethereum. It serves as a DeFi protocol that allows users to trade without intermediaries because it does not use an order book or centralized parties to complete transactions.
Flash Loan is a promising field growing into a major part of the cryptocurrency ecosystem. Equalizer aspires to be the crypto market-leading force in this field, and it is well-positioned to do so.
Several platforms now provide Flash Loan services, but until Equalizer, no platform allowed flash loans to take center stage. Flash Loans has been assigned the lead role by Equalizer. Equalizer's main business concept is Flash Loans. This means that Equalizer's efforts are entirely focused on providing the greatest possible experience for Flash Loans users.
A flash loan fee is a percentage of the loan amount taken by a borrower from the lending platform. This percentage is expected to be repaid alongside the loan by the borrower.
For example, the transaction fee on Aave is 0.09%. A user takes a loan of 100 DAI from the platform; at the end of the transaction, the user is expected to repay a sum of 100.09 DAI, which includes the transaction fee.
The Flash Loan fee is beneficial to the cryptocurrency ecosystem because it provides a different source of income than borrowers' normal interest. This attracts more liquidity, which allows for larger Flash Loans, resulting in higher earnings for depositors.
Gas fees are transaction fees paid to miners on a blockchain protocol for their transactions to be included in the block. The system follows a standard supply and demand process.
The way gas fees work is similar to how gas works in our cars. The car must be filled with enough gas to get from Point X to Point Y.
Similarly, for a transaction to succeed on any chain, the sender must provide enough gas to cover gas fees.
The charge or pricing value necessary to complete a transaction or execute a contract on the Ethereum blockchain network is referred to as gas.
While the amount of gas required for a single transaction may not change, gas prices may. The price of gas is directly proportional to network traffic. Miners are more likely to prioritise your transaction if you pay a greater gas price.
Because Ethereum is one of the most widely used blockchains, gas fees can be very high. The Ethereum chain has so much activity that the blocks are full, and transaction fees grow with each increase in demand.
The BNB Smart Chain supports the creation of smart contracts, making it more adaptable. The BNB Smart chain fee structure is not fixed. Instead, a gas system (similar to Ethereum) is employed to reflect the computing power required for transaction and smart contract operations.
The BSC network uses the Proof of Staked Authority consensus process. Users of the network must stake BNB to become validators, and they will get the transaction fees if a block is successfully validated.
Because the Polygon network is a decentralized blockchain with no single entity or authority in charge of its management. A mechanism has been implemented to prevent the network from becoming overburdened or spammed with transactions. This system levies a tiny price called a gas fee on transaction senders, which is then used to compensate validators that validate transactions on the network.
This fee is paid in MATIC (Polygon native coin), also used on the Polygon network for value transfers, validator payouts, and smart contract executions.
To initiate a flash loan, you need to pay a single gas fee which differs across DeFi lending platforms. The majority of the fee goes to the liquidity providers (LP) that make the Flash Loans possible in the first place.
The amount of traffic that the networks receive is majorly why the gas fee is different from one chain to another. The traffic on the chain would significantly lead to higher fees as the demand has increased rapidly.
Newer chains have lower gas prices and, more significantly, lower token prices. However, as a chain becomes more popular, the token value and gas fee rise.
On Ethereum testnets, the operational costs of borrowing and returning flash loans on three platforms were tested and compared. The comparison of gas fees results are shown in the table below.
The fundamental point of flash loans is to put money into a smart contract, make a profit, and then repay the money at the end of the transaction.
As you can see, the purpose of flash loans is to profit, which is why flash loan fees should be considered before choosing a loan provider.
For example, let's examine two traders. Trader A takes a flash loan of 100 DAI from a platform that charges zero transaction fees like Equalizer, and Trader B takes the same amount from Aave with a transaction fee of 0.09%. At the end of the transaction, Trader A repays 100 DAI while Trader B repays 100.09 DAI. This means Trader A has saved 0.09 DAI and added to the total profit.
Equalizer is the first dedicated flash loan marketplace globally, created to fulfill the increasing need for DeFi lending and borrowing. It stands out by offering the lowest fees and transaction costs and a practically infinite number of token vaults, high liquidity via yield farming, a scalable, multi-chain design, and integration-friendly features.
Here are some reasons why Equalizer is a leading force in the DeFi lending platform field and why Equalizer should be your first choice:
The Flash loan fee is calculated according to the loan's fixed rate. Each lending platform has its own fixed rate, but this rate might be subjected to a discount depending on the cost of tokens.
From the borrower's standpoint, flash loans are generally risk-free because they are uncollateralized. Unfortunately, multiple attacks on flash loans have occurred in recent years, resulting in the loss of millions of dollars. Because smart contracts can be amended if they are not drafted appropriately, the issue stems from a larger DeFi issue. Equalizer has token vaults. Equalizer vault is a secure solution that allows users to safely deposit and withdraw assets and supports flash lending. Flash loan attacks are prevented by limiting the capacity of the vaults.
If you do not repay a flash loan, you will technically not have received the loan in the first place. Remember that a flash loan is executed in one transaction. If both parties (lender and borrower) fail to honor the agreement, the smart contract will prevent the loan from being provided.