Flashloans, The Crazy New Invention of Magic Internet Money

A revolution is going on in finance and it is starting to feel real as young bankers enter an alliance with techies to create a new world.

The latest building block is flashloans, a code based operation where you get money without any condition because your code guarantees it will be paid back in 15 seconds (one block).

In one transaction multiple things can happen. Not just one transfer, there can be 50 transfers or actions in one transaction.

As smart contracts are programs, when you do a transaction, “call a function in the smart contract,” it can execute multiple/many things.

For the flashloan all actions must be done in one transaction. So you have to program all the steps into one smart contract transaction: borrow, act, repay.

If you don’t repay back in the end, the transaction just fails and nothing happens.

So the contract gives you say 10,000 eth in the beginning. If in the end there is no 10,000 eth, then it fails because nodes execute the transaction internally and revert the whole change if it fails.

Crazy right? The eth kind of doesn’t even move except for to execute everything and get back to where it was.

It’s just… well, magic. Magic created by this very new invention of a Turing complete network with its own coding language and its own automated “accountants.”

So the accountants, the nodes, look at this code, and if in the end the 10,000 eth is paid back, they execute it and “publish” it, so making it live code. If instead the execution of all these open source actions shows 10,000 eth is not paid back, then they just don’t publish it.

Sounds nuts, because in many ways it’s a whole new area. You have to know how to code however to take advantage of it because you have to specify every single step, but after spending a few weeks on a Solidity tutorial you can basically get free money for arbitrage or whatever opportunity you may have come up with that can be done in one set of steps.

Some guy for example made $360,000 by taking numerous steps in just one transaction, so bringing this whole thing to everyone’s attention.

Yet this isn’t the only invention in the decentralized finance (Defi-ance) space. Fulcrum for example talks of super liquidity. Something perhaps as cool as this flashloans thing, a name that is new but the DyDx smart contract apparently always allowed the flash borrowing at no charge at all. A new defi project came on, Aave, that gave the operation the name of a flash loan.

For slightly more permanent loans there’s talk of turning things like Collateralized Debt Positions (CDPs) into a token that acts kind of like a promissory note.

So for something like dai for example you have to put down let’s say 35 eth to get back 15 eth worth of dai. The other 20 eth is doing nothing save for being a buffer, so you could potentially have a token that has ownership over this 20 eth, and now you can use that too.

You’re basically kind of loaning the same collateral to different parties. So that can cause problems but as it is code based, and as the ethereum network knows everything, then the code “bots” should perhaps be able to execute things in real time in a way that doesn’t quite create anything out of thin air and in a way where there can’t quite be a default, but there can potentially be a cascade depending on how price reacts.

From that there can be other building blocks with investor Dan Elitzer describing this very new world, built in the past two years that is now beginning to take shape, as follows:

“They’re trying to build the tools that will ultimately make every imaginable financial asset, service, and tool available via open source software on the phone of every person on the planet.”