Lesson 10: Flash Loans and Advanced Primitives

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Lesson 10: Flash Loans and Advanced Primitives

🎯 Core Concept: Flash Loans

Flash Loans represent a financial primitive with no equivalent in traditional finance. They allow borrowing immense capital without upfront collateral, provided the liquidity is returned within the same transaction block.

📚 How Flash Loans Work

The Mechanism:

1. Borrow funds (no collateral needed)

2. Execute operations (arbitrage, collateral swapping, etc.)

3. Repay loan + fee in the same transaction

4. If repayment fails → entire transaction reverts (as if it never happened)

Key Insight: The atomicity of blockchain transactions makes this possible. Either everything succeeds or nothing happens.

Flash Loan Transaction Flow

Atomic Transaction Diagram

📚 Use Cases

• Arbitrage: Buy on Exchange A, sell on Exchange B

• Collateral Swapping: Refinance loans without upfront capital

• Liquidation: Liquidate positions and keep the bonus

The Dark Side: Flash loans are also used by attackers to maximize exploit impact.

Advanced DeFi Primitives Overview

Interactive Yield Farming Calculator

Use this interactive tool to calculate potential yields from advanced DeFi strategies:

Yield Farming Calculator | DeFi Universitydefi-university-app.web.app

🔑 Key Takeaways

1. No Collateral Required: Flash loans don't require upfront capital

2. Atomic Transactions: Must repay in the same block or transaction reverts

3. Powerful Tool: Enables sophisticated DeFi strategies

4. Also a Weapon: Attackers use flash loans to amplify exploits

5. DeFi-Native: This primitive only exists in DeFi, not TradFi

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Next Lesson: In Lesson 11, we'll explore comprehensive risk management in DeFi.