What is a flash loan⚡⚡?
A type of loan which allows you to borrow🤲 any available amount of assets without putting up any collateral, but with one twist, you will have to return the borrowed amount within one block transaction.
Complicated🧐?Let us simplify this.
Let’s put it this way, for very transaction that you do on blockchain 🔗, a new block is created. So, suppose Ramesh sends Suresh 1 ETH(5 star costs are surging😬), 1 new block is created & if Suresh invests that 1 ETH into any liquidity pool, one more new block is created, now if Suresh wants to withdraw his ETH, then 1 more block is created. So how the hell does flash loans⚡work if you have to repay within the same block.
Hold your Horses💁♂️. It is possible if you can write a piece of code as a smart contract to make many numbers of transactions in one block. But do you have to learn to code👨💻 to be able to do this? Nope.❌
You can automate the process by using the FURUCOMBO protocol, which works without any coding.
So, What are its use-cases for Flash Loans? you ask.
1. Arbitrage trading
2. Collateral swap
3. Self-liquidation
ARBITRAGE TRADING
Let’s say bitcoin is trading at Rs.100 on CoinDCX and Rs.101 on WazirX, so you can BUY Bitcoin on CoinDCX and sell on WazirX to get that Re.1 profit💰. Now, what if you could get a flash loan on AAVE of Rs. 10 Lakhs and you could automate the process using FURUCOMBO to,
1. Take a flash loan on AAVE worth Rs. 10 Lakh
2. Buy Bitcoin on CoinDCX for Rs.100/Bitcoin ie. 10,000 Bitcoins
3. Sell Bitcoin on WazirX for Rs.101/Bitcoin
4. Repaying back the flash loan to AAVE
All in 1 block📦! and you could make Rs. 10,000 instead of Re.1 just like that.
COLLATERAL SWAP
To borrow assets in the Crypto world, you will have to keep assets as collateral.
Assets kept as collateral can be the same or otherwise as per requirements and also in some cases you may need to over-collateralize.
For eg. Let’s say you lock 🔒 in $100 ETH as collateral and you get to borrow $60 USDC making the LOAN-TO-VALUE (LTV) Ratio 60%, now what if the value of ETH falls down by 20%, your collateral value will only be $80 and your LTV ratio will be 75%. Some protocols are not comfortable giving you loans at such high LTV, so they will liquidate you.
That’s why you should keep collateral assets that you are bullish on so that your LTV goes lower and lower. As you have used the $100 ETH as collateral to borrow $60 of USDC, but later you get less bullish on ETH and very bullish on CHAINLINK. So now to swap the collateral from ETH to LINK, you have to repay $60 of USDC get $100 ETH back and then swap it to $LINK, and then use $LINK to provide collateral and again borrow $60 USDC. This process can be automated using flash loan.
SELF-LIQUIDATION
Taking the above example, let's say you locked in $100 ETH to borrow $60 USDT and then used that USDT to pay your house bills by cashing it out. Say, after a month, the value of your locked-in $ETH becomes $500, now you want to reap those profits. If you go by the conventional way, you will have to repay your $60 USDT loan & then remove your $500 ETH collateral and then sell it.
But with flashloan, you can borrow $60 of USDT, repay the loan, get your $500 ETH (collateral) and then repay the $60 of USDT that you took out as a loan, all in one block transaction.
These are some of the few quirky little things that you can do in the crypto world.
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