An analogy for Flash Loans

Decentralised finance applications have introduced the novel method of borrowing flash loans. Compound, AAVE and a few other Ethereum based protocols offer flash loans. To give a real life analogy of whats going on, I present the following analogy.

Taking a flash loan is like being in a market with a lender who gives you wad of cash to spend. You need to return it in 1 minute, plus a fee. Whats more, the cash is marked with red dye to make it possible to identify which notes came from the bundle.

Your job is to go around, buy and sell goods in a minute, and return the principle sum of money along with a fee(0.1 %). Here is the catch. If you don’t return it in the minute, the lender will go to all the traders and buyers in the market and retrieve all his notes, which were marked with red dye. Any remaining cash with you will be taken back by the lender.

But, lets say you managed to earn the loan fee through buying and selling, you can return the principle+fee to the lender, and keep the rest. Profit!

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