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Introduction to Flash Loans

Flash Loans are a new development in Decentralized Finance (DeFi) and one that is proving particularly lucrative to cryptocurrency holders.

Advanced users discovered that it is possible to use smart contracts to exploit temporary differences in the prices of assets. In the old finanical system this was called arbitrage.

Arbitrage

In the legacy financial world of stock markets, the process would look like this. A trader would hold assets (for example futures contracts) on two markets simultaneously. For this example let’s say on the New York Stock Exchange and the Tokyo Stock Exchange.

If he saw a price difference on one market (one is cheaper than the other) he could simultaneously sell the asset on the more expensive exchange and buy the same amount on the cheaper exchange. He would end the day with the same amount of asset he started with, and a profit from selling on the expensive exchange. He would then repeat this process the other way when the price difference reversed.

Flash Loans

Moving back into the world of cryptocurrency in its simplest form, a flash loan can be a form of arbitrage. For example, you discover that a token is higher priced on one decentralized cryptocurrency exchange than another. You execute a smart contract to simultaneously buy that asset on the cheaper exchange, and sell it on the more expensive exchange, and deliver the profit back to you.

It’s that simple.

Things can be more advanced and involve multiple coins or tokens, and multiple exchanges. The steps are potentially lmitless. All you pay are the smart contract gas fees. If the flash loan is unsuccessful (ie. doesn’t make a profit) all you stand to lose is the gas fee (transaction fee). The original cryptocurrency you put into the contract is automatically returned to you.

Create a Flash Loan

FlashLoans.ai is a flash loan generator based on machine learning and artificial intelligence. You can execute a flash loan with no coding experience.

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