DeFi flash loans skyrocket to more than $130 million per day

DeFi isn’t just about yield farming, and another new financial tool has rapidly been on the rise.

More than $138 million worth of flash loans were issued via Aave on Monday, a new all-time high for the novel financial instrument. Flash loans allow users to take out sizable loans with no collateral, on the condition that on-chain activity with the funds are profitable and all activity can be completed in a single block.

It’s another way DeFi protocols are putting locked capital to use, developing financial innovations and all the risks and rewards that come with them.

Flash loans from Aave launched in January 2020 and have seen spectacular uptake in recent weeks, with the total value of loans increasing by more than 1,000% since July 1. Flash loans allow users with no collateral to write smart contract instructions for the execution of short-term financial actions like arbitrage, in which an asset is bought for one price and then immediately sold at a higher price to a different buyer.

If transactions submitted won’t result in a profit or can’t pay back the loan amount, the entire string of transactions will be reversed. Aave flash loans that do result in a profit are charged a 0.09% fee from the gains, used to support the Aave protocol and provide returns for liquidity providers that make the loans possible.

The vast majority of flash loans are denominated in USD-pegged stablecoins, with MakerDAO's Dai and Circle's USDC making up close to 95% of all flash loans issued on July 27. Aave flash loans have also increased substantially in maximum size over the course of the month—on July 1, the largest loan issued was worth around $250,000. The largest loan issued on July 27 was worth a whopping $9 million, 35x growth in under a month. 

Flash loans were first introduced in 2018 by DeFi precursor open-source bank Marble, and subsequently has been an essential component in a pair of high-profile DeFi hacks. In those exploits, flash loans were used to provide the capital needed to take advantage of manipulated oracle pricing, allowing the purchase of hundreds of thousands of dollars worth of tokens at a massive discount.

Flash loans are a novel and unique piece of the DeFi landscape, only enabled through the unique design features of the Ethereum blockchain. Their popularity is increasing, but with the potential to cause sizable losses for unprepared counterparties, it’s yet to be seen if flash loans will be a force for good or ill in the crypto market long term.