In brief

  • Aave has issued nearly $498 million in flash loans since launching them in January.
  • Flash loans give technically-minded users access to tens of millions in capital for a tiny fee, but only for a few seconds.
  • Flash loans can be used for arbitrage trades.

DeFi lending and borrowing platform Aave has issued nearly half a billion dollars in flash loans this year, as users employ the novel financial tool to make whale-sized transactions without putting up collateral.

Aave has issued more than $498 million in flash loans, increasing its dollar haul by more than 55% during the month of September, according to Aave analytics data provider Aavewatch. 

Flash loans, which Aave made available nine months ago, allow DeFi users to pay a nominal fee to use assets pooled in Aave smart contracts for micro-term loans. The growing loan volume shows just how much the nascent DeFi space has to offer when it comes to financial innovation.

DeFi is short for decentralized finance, a system of automated protocols running on blockchain technology that allow financial activities, like taking loans or earning interest on deposits, without any centralized third-party coordination. Instead, coded scripts known as smart contracts execute user requests, lowering overhead costs and opening up new financial strategies.

Flash loans allow technically-minded Aave users to take out multi-million dollar loans for a fee of less than 0.1%, so long as they are able to pay the loan back during the course of a single Ethereum transaction block, which typically lasts less than 30 seconds.

They have a variety of uses, such as allowing loans to be inexpensively shifted from one service to another. But the most common application is for crypto arbitrage, where a user buys one asset at a low price from one place, then immediately sells the same asset at a higher price in a different place. Normally, arbitrage requires an existing reserve of capital, but flash loans allow anyone to access millions in capital if they can identify opportunities and develop the right code.

The substantial loan volume already achieved shows that flash loans are an increasingly popular DeFi tool, but have also enabled bad actors to exploit other experimental projects, like the recent Eminence Finance hack. For better or for worse, flash loans are making an impact on the world of DeFi, and we should expect even more activity as clever traders devise more ways to leverage their new financial power.