How Do Flash Loans in DeFi Work and What Are Their Primary Use Cases?

A flash loan is an uncollateralized loan that is borrowed and repaid within the same blockchain transaction. A smart contract allows a user to borrow a large amount of assets from a liquidity pool without providing any collateral.

The condition is that the loan must be repaid by the end of the transaction, along with a small fee. If the borrower fails to repay the loan within that single transaction, the entire transaction is reverted, as if the loan never happened.

Primary use cases include arbitrage trading, collateral swapping, and liquidations.