Flash Loan
A flash loan is a transaction in which a specific quantity of liquidity is borrowed and repaid in the same transaction or block.
What Is a Flash Loan?
A flash loan is a type of
DeFi loan that is
swiftly processed, acquired, and repaid in a short period without the need for collateral. Flash loans are an innovative solution offered by the
Aave platform that is enabled by the way data is recorded on the
Ethereum blockchain.
There is no delay between borrowing and repaying the funds since everything is handled synchronously. Atomic composability is thus required for flash loans to operate, as everything must either settle or fail at the same time.
Flash loans
do not require collateral because there is no credit or counterparty risk. As a result, flash loans are extremely capital-efficient, as they offer high amounts of
leverage. This kind of
capital efficiency is only attainable in DeFi and not in regular financial markets.
Flash loans are often
funded through lending protocols, like Aave or CREAM, which provide single-transaction loans as a function that enables them to be combined with other
dApps, like Uniswap or Sushiswap.
Although the transactions are swift, flash loans are not safe from exploits, a term called
flash loan attacks is often used, which is a
type of DeFi attack in which a bad actor obtains a flash loan through a lending protocol and manipulates the market in their favor using different types of black-hat techniques.
The most popular forms of DeFi assaults are flash loan attacks, which are the cheapest to carry out and the simplest to get away with. They've been making headlines since DeFi's meteoric rise in the past year, and they’ve become much worse in 2021, with hundreds of millions of dollars in losses to date.
With a flash loan, a user can borrow as much as they want without any upfront costs. If you want to borrow $50,000 worth of ETH, for example, a lending protocol will provide it to you instantly, but that doesn't imply it's yours. You must do something with the borrowed funds to repay the debt and maybe pocket any remaining funds.
To make this work, the procedure must be quick, and the debt must be paid to the protocol promptly, otherwise, the transaction will be reversed. Because the commitment to pay your loan is enforced by a blockchain, a decentralized lender does not demand collateral from you.
Attackers of flash loans rely on devising new ways to distort the market while still adhering to the blockchain's laws.
Some popular examples of flash loan attacks are the PancakeBunny attack, Alpha Homora Protocol hack, DeFi yield farming aggregator ApeRocket flash loan attack, and many others.
To avoid such attacks, instead of depending on a
single DEX for its price feed, DeFi platforms could leverage decentralized pricing oracles like Chainklink and Band Protocol to decrease the attack vector for flash loan attacks.
The lag in reaction times from makers of DeFi platforms is one of the most important aspects that allow exploiters to just get away with flash loan assaults. To avoid this from happening, automated tools should be used. OpenZeppelin Defender, a technology that allows project managers to identify smart contract vulnerabilities and other strange behavior, allowing them to respond quickly and neutralize threats.