The Bank of Canada is taking a closer look at flash loans, an innovative tool in decentralized finance (DeFi).
A recent Bank of Canada publication has revealed that the institution is evaluating the opportunities and risks of flash loans. flash loans, a blockchain-native financial instrument that enables unsecured loans and liquidity in seconds.
The study, led by researcher Jack Mandin, notes that this innovation, currently limited to the crypto ecosystem, could migrate to traditional financial systems through asset tokenization, generating new opportunities and regulatory challenges.
BUY ETHEREUMThe report coincides with a context of monetary reforms in the country, where the central bank cut its key interest rate to 2,75% in March to counter the effects of a potential trade war with the United States.
Canada sees opportunities in blockchain flash loans
Flash loans operate through smart contracts that execute indivisible transactions. If the loan is not repaid within the same blockchain block, the transaction is automatically canceled, eliminating the risk of default. This unique mechanism is made possible by the seamless nature of blockchain transactions, which means that all transactions within a transaction must be successful or none of them are executed.
In the recent report published by the Bank of Canada, entitled “Risk-Free Uncollateralized Lending in Decentralized Markets: An Introduction to Flash Loans”, it is noted that the technology underlying this innovation could be applied to tokenized assets, such as bonds, stocks, or derivatives. For example, a commercial bank could offer instant loans for business mergers, provided the transaction is completed within a predetermined timeframe.
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Speed is one of the key features of flash loans, allowing users to take advantage of arbitrage opportunities and other high-frequency trading strategies that would be impossible with traditional lending. The absence of collateral is also crucial, allowing users to access large amounts of capital without having to lock up their own assets, increasing market efficiency and flexibility.
TRADE WITH STABLECOINSA little-understood innovation in technology
According to the bank's report, flash loans have facilitated more than $2 billion in loans in the last year, on blockchain networks compatible with the Ethereum Virtual Machine (EVM). However, despite this figure, which reflects the scale of this innovation's use in the crypto market, it is still a technology poorly understood by academics and researchers at central banks, including Canada's.
Therefore, Mandin's report aims to provide an introduction to the innovative potential of these chain loans, in order to provide the necessary background and context to motivate future research on the topic by these banking institutions.
Mandin, after his in-depth research, concludes that “Flash loans expand access to liquidity and are used by highly sophisticated actors for various practical applications.”.
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