Flash loans are instant loans issued by liquidity providers through decentralized finance liquidity protocols. The borrowers can borrow funds from a liquidity pool that is filled by liquidity providers.
Every pool is essentially a virtual vault in the form of a smart contract. Every such pool is non-custodial, which means that the funds held in the smart contract are never locked in it and can always be withdrawn by the owner.
In order to incentivize liquidity providers to issue loans, there is an interest-forming mechanism that controls the interest for every pool based on supply and demand. But the lenders have to be protected. With long-term loans, the borrower has to provide collateral to the lender to ensure protection of the loaned funds.
With flash loans, the mechanism ensuring financial protection of the lender is different. Flash loans imply instantaneous loans, which should work relatively instantaneously for both sides. Thus, there is no collateral provided for flash loans as it would take too much time. Instead, the loan should be repaid by the borrower within the same transaction. Thus, the borrower repays the loan to the liquidity provider in the same transaction he receives the loan. Therefore, if the loan is not repaid within that transaction, it should be nullified.
This requires a complex transaction mechanism that could reverse or void the transactions that do not comply with the conditions. One of the blockchains that allows doing that is Ethereum. It can process multiple operations within one transaction and can also reverse the transaction if one or multiple of its conditions are not met. Therefore, in case the borrowers do not repay their flash loan within that same transaction they have received it in, the transaction will be reversed as if it never occurred.
However, this might sound nonsensical: taking a loan that you must instantly repay. What is the point of that? The point is that the capacities of those sophisticated blockchains on which loan-providing liquidity pools operate allow the borrower to get a loan, perform the intended operations and repay the loan within a single transaction. This basically ensures that the interests of all parties participating in a flash loan are safely insured.
What Use Cases Flash Loan Exhibit
Arbitrage is the most conceptually simplistic and popular use case of flash loans. Arbitrage allows people to make profit out of the discrepancy of prices of assets across different trading protocols. If asset A costs $1 on Exchange 1 and $1.1 on Exchange 2, the price discrepancy is $0.1. Therefore, a trader can buy the asset at a cheaper price on Exchange 1 and sell it at a higher price on Exchange 2. The gas fees and exchange commissions should be factored in when doing arbitrage trading, but this is the general idea.
Flash loans thus allow the borrowers to maximize this profit-making mechanism by an instant issuance of funds to the borrower who can instantly use them to implement the operation described above. The quickness of this operation allows arbitrage traders to make the most of their trading strategy.
A collateral swap is a way of exchanging different digital tokens by using decentralized lending services. A collateral swap allows DeFi users to swap the crypto asset used as collateral to take out a long-term loan in another crypto asset, without the need to change anything else in respect to the loan. For doing this, you need to have additional capital and use it a buffer, but using a flash loan service this becomes more efficient as the flash loan becomes the temporary buffer.
Liquidations and Self-liquidation
Long-term DeFi lending services require overcollaterization due to the high volatility of the loanable assets. And in case the borrower cannot repay the debt and his collateral devalues, his collateral will be liquidated and he might have to pay a fee of 3% – 15% on top of that while a liquidator repays the borrower’s debt and gets a bonus for doing that. However, that forces the liquidator to lock a lot of liquidity in highly volatile digital assets, which puts his capital at serious risk. Using flash loans, liquidations and self-liquidations becomes possible without putting anymore the capital at risk.
Given that all of this is done automatically, it becomes a user-friendly way of maximizing passive income with decentralized liquidity pools that does not require constant user involvement in the process.
What is Equalizer.Finance and how does it fit in the DeFi Flash Loans Market
Equalizer.Finance is the first flash loans marketplace, a dedicated platform that brings together liquidity providers and borrowers. On one side the platform incentivizes LPs for staking their funds in secure vaults, by receiving more tokens coming from the fees of the flash loans provided. Additionally, the LPs are automatically part of the Yield farming program, designed to stimulate long-term liquidity providers. On the other side, borrowers are provided with a plethora of liquid pools (vaults) that will bring more advantages than any other competitor in the market: lower fees, a wider range of tokens, a minimum level of available liquidity and reliability in any market condition.
The multi-chain efficiently scalable infrastructure of Equalizer gives access to an unprecedented variety of liquidity pools. This gives borrowers and lenders a much higher exposure to borrowing and lending in the DeFi space and allows them to maximize liquidity opportunities by enabling profitable transactions and boosting the trading volume. .
The dynamic fees allow Equalizer’s users to balance the fees so both liquidity providers and borrowers get their incentive and profit-making opportunities. On top of that, the next-generation infrastructure of Equalizer designed with a proactive vision for future flash loan market expansion is able to scale efficiently due to parallel transaction processing on different chains, which puts Equalizer ahead of many rivals in the flash loan market.
If you get interested in Equalizer and want to know more about its platform, you can always find more details about it at https://equalizer.finance/