The DeFi ecosystem is constantly evolving and always offering new innovative features. Flash loans, instant loans that have repeatedly agitated the sphere of decentralized finance, are one of them.
Back to flash loans
The flash loansor instant loans, are a category of loans offered by the DeFi ecosystem. However, these loans have nothing in common: these are loans that are granted without collateral, with the sole condition that they be repaid immediately.
Do not panic, it is normal that this concept may seem absurd at first glance: repaying the entire loan when you take it out, what a funny idea, isn’t it? However, put in the context of cryptocurrencies, this one makes sense.
Indeed, thanks to the composability of transactions on Ethereumit is possible to perform multiple actions within a single transaction. For example, taking out a flash loan, using it in any way and repaying the loan plus interest, and all in a single transaction.
And There you go ! Flash loans are as simple as that. The main advantage is that they have no counterparty riskas explained Albert Dessaint from Blockchain Partner:
“This feat is made possible by the way this loan is structured: the borrower must contract, use and repay the money in a single transaction on the blockchain. With this structure, the counterparty risk is nil because the money will only be lent if the three actions are executed with certainty. »
These loans are partly attractive because they are unique to the DeFi ecosystem. It is one of the first services exclusive to decentralized finance, as highlighted by Coinbase employee Julian Koh on Twitter :
“Flash loans are the most interesting thing in DeFi today, because they represent something that literally cannot be done in traditional finance”
What applications for these loans?
In the context of traditional loans, it is difficult to see the interest for this type of loan. But once again, placed in the context of cryptocurrenciesflash loans offer a wide range of opportunities.
In practice, these loans are a dream tool for traders of decentralized finance who seek to make arbitration between the various protocols of the ecosystem. Thus, flash loans give them access to large amounts of capital, without requiring initial funds.
What are the risks for flash loans?
We have seen earlier that these loans pose very little risk to the borrower or lender because repayment is assured. However, this does not mean that flash loans are devoid of risks for the ecosystem.
Indeed, the latter have already been used on several occasions for purposes harmful to the ecosystem. While these loans provide traders with access to substantial capital, they also allow hackers to access these same capitals.
This is how several protocols have seen flaws exploitedmainly through flash loans, which allowed them to access the capital required to carry out their attack.
In February 2020, the protocol bZx was the victim of 2 successive attacks, leading to nearly $1 million in losses in ETH. These two attacks were made possible thanks to flash loans.
“Armed with borrowed capital, traders were able to manipulate the price of illiquid cryptocurrencies on various decentralized exchanges and cheat the bZx service on the value of these cryptocurrencies without triggering safeguards. »explains Albert Dessaint about the attack.
More recently, in June 2020, the Balancer protocol in turn suffered an attack, once again made possible by flash loans. Amount of losses: $500,000 in ERC-20 assets.
Once again, this product from the cryptocurrency ecosystem is a double-edged sword. On the one hand, a godsend for traders and on the other a source of liquidity for hackers, flash loans have not finished being talked about.