How Does a Flash Loan Differ from a Traditional Smart Contract Loan?
A flash loan is an uncollateralized loan that must be borrowed and repaid within the exact same blockchain transaction. If the repayment fails within that transaction, the entire transaction is automatically reverted, ensuring the lender takes zero risk.
Traditional smart contract loans are overcollateralized and repaid over time, across multiple transactions. Flash loans are primarily used for arbitrage or collateral swapping.
Glossar
Uncollateralized Loan
Condition ⎊ An uncollateralized loan, specifically a flash loan in decentralized finance, is issued under the strict condition that the borrowed capital must be repaid within the same atomic blockchain transaction.
Traditional Smart Contract Loans
Structure ⎊ Traditional smart contract loans are characterized by their overcollateralized structure and multi-transaction repayment schedule, forming the bedrock of decentralized lending protocols.
Flash Loans
Mechanism ⎊ Flash loans represent uncollateralized lending protocols within decentralized finance, enabling users to borrow and repay funds within the same transaction block; this functionality is predicated on the deterministic nature of blockchain execution, eliminating credit risk for lenders.
Flash Loan
Mechanism ⎊ A flash loan represents an uncollateralized loan executed entirely within a single blockchain transaction, enabling borrowers to access substantial capital for a very short duration, typically seconds.