• Flash Loan is the DeFi platform’s standard for offering over-pledged loans where the debtor deposits more assets than they withdraw.
  • Flash loans are repaid in similar transactions they are taken out of, where smart contracts are used to make successive transactions that result in the borrower eventually repaying the loan.
  • Lightning credits are Atomic, which means they can only be processed after all the transactions involved have been executed.

Why should I use Lightning Credit?

Basically, flash lending has three core purposes, pledge exchange, self-liquidation and trade arbitrage.

Various exchanges may charge different prices from specific assets, thus opening the door to selling and acquiring similar assets on various exchanges for profit, a mechanism known as trade arbitrage. It can be executed manually, and doing so usually does not generate much profit.

Transferring the underlying pledges used in a DeFi loan can be both annoying and time-consuming, especially for those who classify their virtual assets. Lightning Loans can be used to quickly pay off loans to release locked assets, which can then be used in an exchange.

If the value of the underlying pledge for a traditional DeFi loan drops significantly, it will be liquidated. This means that the pledged asset will trade at a discount to pay off the debt, resulting in a loss for the debtor. Lightning loans can be used to self-liquidate and fully complete the loan, allowing people to withdraw the assets pledged as collateral without incurring any losses.

What is the actual threat of lightning loans?

Because lightning loans are Atomic, they still carry some risks. Whether successful or not, they incur network gas fees, which expose borrowers to the risk of pre-empting the transaction.

Most lightning loans use the ETH network, as it was the primary DeFi-backed network that initially gained popular acceptance. With the dramatic increase in the cost of Ether gasoline, pre-emptive trading has become a major issue for those seeking a quick loan.

Another risk of using Ether for lightning loans is a re-entry attack, where a hacker can withdraw all the funds held by a smart contract. This is done through an external smart contract capable of multiple withdrawals before the withdrawal balance is confirmed.

The use of Ethernet smart contracts is obviously weak for re-entry hacks due to the Solidity programming language of Ethernet.

Also Read: XDC Network: A Powerful Blockchain Project Revolutionizing the Global Business and Trade Space

How we can avoid the threat of flash loans

Flash lenders could suffer millions of dollars in losses if weaknesses regarding re-entry are found in the popular ethereum-based DeFi platform's smart contracts. Several people are seeking DeFi solutions outside of the ethereum network. One alternative gaining traction is White Whale, an initial cryptocurrency project offering flash loan UST arbitrage within the Terra network.

Terra Flash loans are much safer than loans on Ether. This is due to the fact that Terra was developed using Cosmos, which powers many other popular projects, such as the CoinAchain.

Cosmos smart contract engine (CosmWarm) does not support external calls, smart contracts, Terra's smart contract language is much ahead of Ether in terms of tolerance. It makes its white whales safe from re-entry hacks.

Preemptive trading is an inescapable threat, and the best way to reduce its likelihood and the damage it causes is to reduce it. Most of these attacks are carried out by bots on Ether, thanks to ETH volatility and rising gasoline prices. A shift to a network with lower and stable network costs could massively reduce preemptive trading.

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Nancy J. Allen is a cryptocurrency enthusiast who believes cryptocurrencies will inspire people to become their own banks and move away from traditional currency exchange systems. She is also interested in blockchain technology and its capabilities.

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