What are Flash Loans?

Written by Nikola Milinkovic
Updated 5 months ago

Aave became a wildly popular protocol in DeFi, in part thanks to Flash loans. Flash loans are the first uncollateralized type of loan in DeFi. Aave Flash Loans are automated loans in which the borrowed amount must be returned within one, single Ethereum transaction. Using flash loans you can borrow instantly and easily, without provided collateral as long as that liquidity is returned to the pool within the same transaction block.

The Aave Flash loan process occurs within a single Ethereum transaction and relies on the fact that transactions on Ethereum can revert, making all other commands void as well if the borrowed capital is not repaid. The amount of borrowed funds is only limited by the current available liquidity of the borrowed asset within the Aave protocol. 

Aave offers a large selection of assets to loan, though it includes a small protocol fee (currently 0.09% of the borrowed amount).

You can only have a single flash loan in a recipe. It is technically possible to loan more than one asset via Aave, but the UI does not currently support this option.

Generally speaking, flash loans can be used whenever you need a temporary loan that you know you’ll be able to pay back at the end of the transaction. Some of the potential use cases include:

  • Creating a fully leveraged position
  • Collateral or debt asset swaps
  • Closing a position
  • Creating a liquidity mining position
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