A flash loan is one of the most unusual mechanisms in decentralized finance (DeFi).
It lets you borrow cryptocurrency without putting up collateral, even in enormous amounts.
The catch?
The loan must be used and repaid within the same transaction.
Imagine a protocol lends us 1,000,000 USDC.
Within that same transaction, we can use the money to carry out various operations: buy an asset in one market, sell it in another, take advantage of a price difference, and finally repay the million plus the fee.
If, after carrying out all the operations, we can’t repay the loan, something fundamental happens:
the entire transaction is reversed.
The loan, purchases, sales, and other operations are not confirmed.
That’s why loans can exist without the traditional collateral we’d expect from a bank...
But here’s where things get interesting for cybersecurity.
A flash loan isn’t an attack.
The problem arises when someone uses that enormous amount of temporary funding to exploit a weakness in another protocol.
For example:
An attacker borrows 10 million.
They use that money to make a huge trade in a market with little liquidity, temporarily altering the price of an asset.
Another protocol needs to know how much that asset is worth to perform its calculations.
Where does it get that information?
From an oracle.
An oracle is, simply put, a source or mechanism that lets a smart contract access information it needs, for example:
1 ETH = 3,000 USD.
If the protocol uses a poorly designed or easily manipulated price source, it may end up believing that an asset is worth much more... or much less... than it really is.
And that’s where the problem begins.
Flash loan - huge amount of capital - temporary market manipulation - incorrect price - vulnerable protocol makes decisions based on that price - value extraction - loan repayment.
It can all happen within a single blockchain transaction...
That’s why when we hear:
FLASH LOAN ATTACK
there’s something important to understand.
Often, the flash loan wasn’t the vulnerability.
It was simply the tool that made it possible to obtain, for a few moments, the capital needed to exploit a vulnerability that already existed.
And that’s what’s extraordinary about the mechanism:
You don’t need to have millions to move millions.
You borrow them.
You use them.
You pay them back.
And if you found a weakness along the way, the difference could end up being your profit....
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