Flash Loans Explained
Flash Loans allow for a DeFi user to borrow any amount of tokens from a liquidity pool without posting any collateral to obtain the loan. How is this possible? The main feature of a Flash Loan is that the loan must be returned to the liquidity pool within a single block transaction, effectively ensuring that the loan is funded. If the loan is not returned within one block transaction then the entire transaction is reversed and all actions are undone. The automatic loan reversal feature ensures that default risk and illiquidity risk are mitigated.
In short, a Flash Loan can be thought of as an unsecured loan that must be paid back within one transaction block otherwise it will fail to execute and the amount borrowed will be returned to the liquidity pool. Flash Loans can be accessed via “AAVE” or “dydx” platforms.