Flash Loan

A type of uncollateralized loan in decentralized finance (DeFi) that is borrowed and repaid within a single blockchain transaction.

What is Flash Loan?

A flash loan is a unique feature of decentralized finance (DeFi) protocols, primarily on Ethereum, allowing users to borrow large amounts of digital assets without collateral, provided the loan is repaid within the same blockchain transaction. If the repayment (including fees) isn’t completed, the transaction is reversed, ensuring no risk to the lender. Flash loans are enabled by smart contracts on platforms like Aave, dYdX, or Uniswap, leveraging the atomic nature of blockchain transactions where all actions (borrowing, using, and repaying) occur simultaneously.

These loans are commonly used for arbitrage, where traders exploit price differences across decentralized exchanges (e.g., borrowing USDT to buy ETH at a lower price on one exchange and sell it higher on another), collateral swaps, or liquidating undercollateralized positions in DeFi protocols. For example, a user might borrow $1 million in DAI, execute a profitable trade, and repay the loan with a small fee (e.g., 0.09% on Aave) in one transaction. Flash loans require technical expertise, as users must deploy smart contracts to automate the process, and any error can lead to transaction failure.

While flash loans democratize access to large capital for DeFi strategies, they’ve also been exploited in attacks, such as manipulating oracle prices to drain protocol funds. Discussions on X often highlight both their innovative potential and risks, with users sharing examples of profitable trades or cautioning about vulnerabilities in DeFi systems.