Flash Loans

Note: Data in this section last updated March 13th, 2022

Flash loans are an entirely new financial product that let users borrow substantial amounts of capital with no collateral for extremely short time periods (i.e. measured in seconds).

This new product is only possible due to the unique properties of smart contracts, which allow borrowers to execute multiple steps within the same transaction.

For example, let’s see you notice that the price of USDC is $1.00 on Uniswap and $1.01 on Sushiswap. You could code a contract to:

1. Borrow $100 million on Aave

2. Buy 100 million tokens of USDC on Uniswap for $100 million

3. Sell 100 tokens of USDC on Sushiswap for $101,000,000

4. Repay your $100 million loan on Aave

5. Profit a cool $1 million

This works because these steps occur almost instantaneously and within the same smart contract transaction, so there’s no execution or repayment risk. If the code determines this isn’t possible, it simply won’t execute or will return the funds to the lender as if the transaction never happened.

Since inception, Aave has issued more nearly $8B in flash loans, with > $6.5B of that coming in the past year.

Source: APY Vision. Data from March to May 2021.

Nothing close to this exists in traditional finance. Imagine walking into a bank and saying “hey, I’d like to borrow $100M for 10 minutes – I’m not going to give you any collateral and not even going to tell you my name” and getting the loan!