Flash Loans: Aave
This story is written by our Web3 VC cohort.
Most Defi loans are over-collateralized. If the deposited value increases, the borrowing amount increases as a result. However, if the deposit valuation declines, a liquidation event will be triggered.
The collateralization ensures that the deposit is available to any third-party liquidator to pay back the debt on behalf of the borrower and that they get paid a liquidation bonus for the service.
With Aave Flashloans, no capital is needed to execute a liquidation, borrow funds from Aave, pay back the debt on behalf of the borrower, collect their deposit, trade it for the best available price on paraswap.io and return the assets to Aave with a small fee all in a single transaction. The remaining assets are yours to keep!
What is the Aave flash loan?
Aave is a decentralized lending protocol that facilitates lending and borrowing through a “lending pool”, as opposed to peer-to-peer. Aave lends cryptocurrencies such as ETH, a range of stablecoins and governance tokens for Defi applications. Each asset has its own lending pool and different APY based on its demand.
Flash loans are one of Aave’s products, they’re uncollateralized loans that need to be repaid in the same transaction. This is executed by a smart contract.
Aave charges a fee of the loan provided that is used, in part, to pay the lenders.
If the user doesn't repay the flash loan in the same transaction, the transaction will fail.
How are flash loans beneficial for the user?
- It targets traders that don’t have enough capital to perform certain on-chain activities such as arbitrage or to stress-test certain protocols.
- It allows traders to execute trades without capital at a low cost.
- No need to KYC.
- Services allowing self-liquidation can be built, instead of paying a liquidation penalty.
- Collateral swaps (A collateral swap allows users to switch the collateral they’ve given to take out a loan on a multi-collateral lending app).
However flash loans can be used for nefarious purposes, a case in point is the Beanstalk attack. Beanstalk was a credit-based stablecoin protocol project based on Ethereum, and the hack has been categorised as a flash loan attack and has resulted in $182 million in total losses.
Meet the cohort writers!
Marco is an entrepreneur passionate about blockchain technology and communities, particularly enthusiastic about the intersection between gaming and NFTs. He co-founded TM Gaming Academy, a Web3 Gaming Guild, and Biz Italia, which is expanding the Helium Network in Italy.
Studied Accounting, with a focus on financial management and performance management. Chana has experience in finance roles, including an internship and a fellowship in VC.
Venture Partner at Ada Ventures, angel investor and a recovering founder. Previously worked at Ascension, an early stage generalist fund and Motion Ventures, a pre-Series A fund investing in the maritime value chain. He’s also a Future VC alumni. Prior to VC, Rockman co-founded a venture-backed cyber security start-up and originally trained as an engineer.
