A flash loan is a sort of uncollateralized loan that allows a user to borrow assets without providing any prior collateral as long as the borrowed assets are paid back inside the same blockchain transaction. This type of loan is also known as a “single-transaction loan.” The decentralized finance ecosystem (DeFi) started by adapting traditional financial services, like lending and borrowing, exchanges, futures, and options markets, for use with blockchains. Hence, DeFi stands for “decentralized finance.” As the ecosystem evolved, fundamentally new services were established. These services are only conceivable because of the inherent characteristics of blockchain technology and the permissionless composability made available by applications that use smart contracts.
Similar to the idea of yield farming, the concept of flash loans represents an interesting new financial primitive:
Flash loans allow users to borrow assets from an on-chain liquidity pool without providing any upfront security.
The amount of liquidity borrowed, and a modest fee is returned to the pool inside the same transaction.
If the borrower does not pay back the loan in the same transaction, the entire transaction, including the initial borrowing and any subsequent actions, is reversed.
This cutting-edge mechanism simultaneously improves users’ access to money across various use cases.
In addition, it maintains the financial health of the on-chain liquidity pool, which is the mechanism’s fundamental focus.

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