Flash lending is a unique feature in decentralised finance (DeFi) that allows users to borrow assets without collateral, as long as the loan is repaid within the same blockchain transaction. This innovation is possible because of Ethereum’s smart contract capabilities, which enable atomic transactions (all-or-nothing execution).

How Flash Loans Work:
Borrowing: A user requests a flash loan from a DeFi protocol (like Aave or dYdX), specifying the amount and the operations they intend to perform.

Execution: Within the same transaction, the borrower must use the borrowed funds—whether for arbitrage, collateral swapping, liquidation, or other strategies—and repay the loan plus a small fee.

Repayment: If the loan is not repaid in full by the end of the transaction, the entire operation is reversed, ensuring no risk to the lender.

Use Cases:
Arbitrage: Exploiting price differences across exchanges.

Collateral Swaps: Refinancing debt positions without upfront capital.

Liquidations: Profiting from undercollateralized loans by repaying debt and claiming liquidation bonuses.

Risks:
While flash loans eliminate credit risk, they have been exploited in high-profile DeFi hacks where attackers manipulated prices or exploited smart contract bugs. Despite risks, flash loans democratize access to capital, enabling sophisticated strategies without upfront funds.