What is a Flash Loan?
A flash loan is an uncollateralized lending feature native to decentralized finance (DeFi) protocols that allows users to borrow arbitrary amounts of crypto assets without providing upfront collateral, provided the funds are borrowed and fully returned within a single, atomic blockchain transaction.
Key Mechanics
- Atomicity: The borrowing, usage, and repayment of funds occur in a single block execution. If the borrower fails to repay the principal plus fees before the transaction ends, the entire transaction reverts, restoring the state as if the loan never occurred.
- No Collateral Required: Unlike traditional or standard crypto lending, lenders risk virtually zero capital default due to the smart contract's enforcing mechanism.
Use Cases and Security Risks
- Arbitrage: Capitalizing on price discrepancies for an asset across different decentralized exchanges without committing upfront capital.
- Collateral Swaps: Replacing existing loan collateral across lending platforms efficiently.
- Flash Loan Attacks: Malicious actors can utilize massive borrowed liquidity to manipulate decentralized price oracles, drain liquidity pools, or exploit smart contract vulnerabilities while staying within blockchain protocol rules.