Hi friends, this is Lucky Ali, and welcome back to my new blog. Before diving into this information, it is good to visit my previous article. The world of decentralized finance is nice because here we can see some great tools, and flash loan is one of them. Flash loan is an uncollateralized loan, and we have seen that this loan has helped a lot to many traders in the crypto world. So now you can understand the importance of flash loans, so let's talk more about it.
Problem with traditional finance loans
Getting loans is a headache in traditional finance because I personally faced many issues with traditional loans. During the COVID time, my EMIs were not regular, which is why my credit score has been destroyed. Credit score is also called CIBIL score here, and it is very sensitive. It is so sensitive that you can't even check your own CIBIL score; otherwise, it can go down. So, because of that, I have faced many difficulties. Also, the interest is much higher, and before giving loans, they cut the huge charges from your fund. file charge, documentation charges, platform charges, bla bla blah...
Other than this, there are many problems that exist that need a separate article. Coming to the point, flash loan flips this model and provides a better user experience. There is one condition, and you don't need to provide any collateral, and that condition is that the borrowing and repayment should be done with the same transaction on the blockchain. With this one condition, you can borrow the fund and even a large fund allowed without collateral, but only one condition is there that I told you.
How Flash loan work?
How is this even possible? It is because of the smart contracts. This is possible because of the atomic transaction that is available on Ethereum. How can someone trust you? So it is not about trust because the transaction will be reversed in the case when you do not repay the loan amount. So both the lender and borrower are happy with this system.
Flash loan is used by traders because this loan is used for trading purposes when the token is priced differently on different exchanges, so using flash loan, the benefit can be taken. Also, there are refinancing loan purposes and complex financial maneuvers. There is a risk because flash loan is often misused by many to manipulate prices.
Despite challenges, flash loan is an innovation, and it is something unique that can't be available in traditional finance, and they can't even think about such a financial tool. Sharing is caring, so do not forget to share this post and also leave a comment below. Now I am ending this information here and will meet you in my next blog.
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Hi I am lucky ali from gujarat, india. I am a crypto enthusiast, blogger, and SEO developer. You can find me on hive, twitter and discord (Lucky Ali#6343). Sharing is caring. Thank you, hive family ♥ |
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