Flash Loans

Flash loans are uncollateralized loans in decentralized finance that must be borrowed and repaid within a single blockchain transaction, with no upfront collateral requirement. A borrower receives the requested funds at the start of a transaction and must return them with an origination fee before the transaction concludes. If the borrower fails to repay within that single block, the entire transaction reverts, protecting the protocol from default. This mechanism enables users to execute complex arbitrage, liquidation, and refinancing strategies that would otherwise be impossible without pre-existing capital. Example: In 2020, the bZx protocol experienced a flash loan attack where an attacker borrowed 7,500 ETH without collateral to manipulate token prices and profit from price discrepancies before repaying the loan plus fees within a single transaction. Why it matters for DeFi: Flash loans democratize access to large capital for arbitrage and liquidation opportunities, but also present novel security risks and attack vectors. Understanding flash loans is essential for both building secure protocols and identifying profitable trading strategies in decentralized markets.

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