Loans
Collateralized loans
Foreclosure risk
It's the risk of overcollateralized positions is that the collateral becomes less valuable than the debt.
Collateralization can back a token
Because there are a lot of collateralization, people will believe the value of the token.
Flash loans
In the traditional fiance, the longer the duration of the loan, the higher the interest rate is. Because the longer the duration of the loan, the more risky it can be.
Well, a flash load is an instantaneous loan, paid back within the same transaction.
The loan will be paid at the end of the transaction. If there is something wrong during the transaction, all the actions will be revert.
Risk of flash loans
Flash loans have zero counterparty risk or duration risk.
However, flash loans have smart contract risk.