Flash Loan

A flash loan is an uncollateralized loan that must be borrowed and fully repaid within a single blockchain transaction — if repayment fails, the entire transaction reverts as though the loan never happened. This is only possible because blockchains execute transactions atomically: all steps succeed together or none do, so the lender takes no credit risk regardless of the amount borrowed.

A concrete example: a trader spots that ETH is priced slightly lower on one decentralized exchange than another. In one transaction, they borrow one million USDC from Aave via flash loan, buy ETH on the cheaper venue, sell it on the more expensive one, repay the loan plus a small fee, and pocket the difference — all without putting up any capital of their own. Legitimate uses include arbitrage, refinancing debt between lending protocols, and swapping the collateral behind a loan.

Flash loans are notorious because attackers use them to temporarily wield enormous capital — for example, to manipulate a thinly traded price oracle and drain a protocol that trusted it. A common misconception is that flash loans themselves are the vulnerability; they are a neutral tool that merely removes the capital barrier, exposing design flaws that a wealthy attacker could have exploited anyway. Protocols defend against this with robust, manipulation-resistant oracles rather than by banning flash loans.