[ad_1]
Similar to traditional loans, flash loans are expected to be repaid in full eventually. However, there are also significant differences.
In a typical loan process, a borrower takes a loan from a lender. The amount is expected to eventually be repaid in full, with interest, based on terms discussed between lenders and borrowers.
Flash loans operate under a similar framework, but with some unique terms and preconditions:
Use smart contracts
Smart contracts are the tools used in most blockchains Make sure that funds don’t change hands until certain rules are met.
When it comes to flash loans, the borrower must repay the entire loan before the transaction is completed.
If this rule is not followed, the transaction will be reversed by the smart contract and the loan will be cancelled as if it never happened.
unsecured loan
Unlike traditional loans, flash loans are unsecured loans, which means that no collateral is required.
However, that doesn’t mean flash loan lenders won’t get their money back if they don’t pay. In a traditional loan, collateral is often provided to ensure that the lender gets the money back in the event of non-payment.
However, flash loans occur within a very short time frame (usually seconds or minutes). This means that while no collateral is required, borrowers must return the full amount they borrowed immediately.
instant transaction
Compared to the longer process of traditional loans, flash loans are processed faster thanks to smart contracts.
Getting approved for a traditional loan is often a lengthy process. Borrowers must submit documents, wait for approval, and repay the loan in agreed increments over a set period, which can be days, months, or years.
Flash loans, on the other hand, are instantaneously accelerated, which means that the smart contract for the loan must be fulfilled in the transaction it lends itself to. Therefore, borrowers need to call other smart contracts to use the lent funds for instant transactions.
Kicker: All of this has to be done within seconds of the trade closing. Hence the name: Flash Loans.
[ad_2]
Source link
