Ethereum Stack Exchange is a question and answer site for users of Ethereum, the decentralized application platform and smart contract enabled blockchain. It only takes a minute to sign up.
Sign up to join this community
I was watching an old video on AAVE and at around the 2:45 mark it talks about "refinance a loan with flash loan".
I am trying to understand what it means. I understand a Flash loan is a big loan that you need to re-pay within the same transaction, but I am not much aware about all the ways it can be used in defi.
Debt refinancing is the second-best use case for flash loans, frequently used in situations where a user creates regular DeFi loans. More often than not, a crypto enthusiast will take out a loan only to discover that another platform offers the same loan but with better interest rates.
In that scenario, the individual could make use of the other platform with the help of flash loans. He would have to pay off the interest rate (e.g., 10%) on the original loan and borrow 5% from the second loan at the more affordable lending platform. The cycle is completed by paying back the flash loan, after which the user ends up having the loan with the better interest rate in his hands.
