Flash Loans, Price Inflation, And The NFT Market Solution — TrustNFT
Understanding flash loans and NFT market distortion
TrustNFT is an emerging analytics platform and marketplace dedicated to decentralized NFT collateralized loans. Our key strength relative to other alternative collateralized loan providers is our Evaluation Machine.
Our Evaluation Machine combines DeFi with NFTs to add much-needed utility and unlock the enormous potential of NFTs becoming part of the mainstream financial landscape. By leveraging AI/ML and big data to aggregate information into trustworthy scores and produce indicative NFT prices, we will streamline NFT market growth like never before.
But before we unroll the benefits of our exciting new AI tool, let’s focus on a recent pain point of the NFT market — artificial inflation resulting from flash loans, and how trustNFT analytics will tackle market distortion.
First, what is a flash loan?
A flash loan is uncollateralized lending carried out by DeFi protocols on smart contracts. They are unsecured and processed instantly via blockchain networks. Like most components of DeFi, flash loans are a financial instrument that helps your average person assert more control within economic ecosystems. Although there are many benefits to using flash loans, they present a few risks, as outlined below.
Flash loans vs. traditional loans
A traditional loan provision is a rigid and slow process with strictly managed payback rules without any flexibility for usual DeFi solutions. On the other hand, flash loans are almost instantaneous, as the name implies. When repaying — the borrower must initiate a smart contract on the same transaction, similar to the traditional framework — a protocol best outlined in CoinMarketCap’s Alexandria blog:
“The smart contract for the loan has to be fulfilled in the same transaction which is lent out, and this means that the borrower has to call on other smart contracts in order to perform instant trades with the loaned capital, before the transaction itself ends, and this is a process which typically takes only a few seconds to complete.”
In other words, a flash loan is an uncollateralized loan that requires the borrower to return the liquidity within the same transaction block. They are unsecured, instant, and enabled by smart contracts.
How are flash loans used?
Like other DeFi solutions, loans target higher-risk borrowers without a credit score or any type of official background check. On the other hand, higher risk brings higher rewards — as usual!
Flash loans are possible thanks to the innovation of blockchain technology which automatically validates users and secures every transaction without an intermediary or centralized authority.
Apart from typical applications, traders use flash loans like any other traditional financial instrument, including the following:
- Arbitrage opportunities: A situation when a trader purchases an asset in Exchange A and immediately sells it on Exchange B for a profit.
- Collateral swapping: Immediately swapping the collateral backing the loan for an alternative form of collateral.
- Reduced transaction fees: Users may encounter reduced costs since flash loans combine many transactions into a single block.
Flash loans are also a way to tap into profit without putting up your assets as collateral. Not to mention they process incredibly fast — pretty much instantly, which comes with its own set of benefits.
Issues with flash loans
Recently, flash loans have come under scrutiny because of their role in the malicious exploitation of DeFi protocols — risks additional to engaging in a higher credit risk lending.
More specifically, the problem is that the inappropriate use of flash loans artificially inflates the price of DeFi assets, like NFTs. One common practice is to use flash loans to inflate historical data of purchases maliciously.
If you understand the NFT market, you know that a lengthy history of purchase may increase the value of any given asset. Increased trading activity with sales prices drifting higher tends to inflate subsequent prices — a term more commonly known in the community as “to the moon.”
Malicious users employ flash loans for smart contract exploitations. We’re referring to scams where the borrower manipulates the setting of the contract to misinform the lender on terms and conditions. There are many cases where the lenders think reimbursement is complete when the borrower momentarily inflated the price of the stablecoin used to repay the debt.
As you can imagine, these types of scams are frequent within the flash loan sector, and they have many characteristics that are constantly evolving.
TrustNFT AI-Powered Evaluation Machine: A robust NFT market solution
TrustNFT introduced novel tools leveraging AI to determine the trustworthiness of NFTs and underlying asset evaluation prices. While we won’t disclose precisely how our innovative AI Machine works, in broad terms, we leverage on-chain and off-chain data sources to obtain an in-depth understanding of all risks related to the underlying asset.
The AI Evaluation Machine covers the most prominent factors: historic auction price data, market features, seller-related activity, content creator-related features, overall collection value, and other unique data points driving risks and price performance.
Our Evaluation Machine tackles artificial inflation problems usually caused by flash loans within the NFT market by transparently decomposing risk factors influencing price performance. In simple terms, more factors than a simple past price performance determine the asset’s intrinsic value.
In traditional finance, financial market efficiency ranges from a weak form to a strong one. The weak form states that the price is determined only by the previous price history. Similarly, our Evaluation Machine incorporates other public and private data about underlying risk factors to improve the information available to our users. At the same time, novel analytics are packed in concise and clear terms to digest!