What is a Flash Loan

Aave is the first protocol in the cryptocurrency space to introduce the concept of “flash loans.” Flash loans allow users to borrow without any collateral. In this type of unsecured loan transaction, borrowing and repayment must be completed within a single block. Currently, Ethereum’s block time is approximately 12 seconds, so completing all operations within such a short period truly makes it “lightning fast” compared to traditional lending.

The name is also related to the 2014 novel Flash Boys: A Wall Street Revolt by American author Michael Lewis. The book tells the story of a group of high-frequency trading firms on Wall Street, who use high-speed computer algorithms and technical means to trade stocks within milliseconds, earning huge profits.

Due to the characteristics of blockchain, a transaction record within a block only becomes a “verified fact” when it is included in a mined block. If a user borrows and then does not repay within the same block, the corresponding loan is automatically canceled, meaning no actual lending activity has taken place.

This is also why flash loans do not require collateral: if there is no repayment, the loan is invalid, and the funds automatically roll back to their original state.

The emergence of flash loans has significantly lowered the cost of obtaining liquidity, as the entire transaction only requires paying a single GAS fee and a 0.09% flash loan protocol fee. As a result, they are widely used for arbitrage.

However, because all operations must be completed within a single block, ordinary users and manual operations cannot achieve this; it requires code to execute the flash loan. Therefore, the entry barrier is relatively high. Additionally, the features of no collateral and flexibility in flash loans have also enabled malicious actors to exploit them for malicious purposes, bringing some negative market opinions **$AAVE **