What Is a Flash Loan?
A flash loan is a type of loan in the decentralized finance (DeFi) space that allows users to swiftly borrow and repay funds without the need for collateral.
It is a feature offered by different platforms, enabled by the capabilities of the Ethereum blockchain.
The Unique Mechanism Behind Flash Loans
Unlike traditional loans, flash loans are processed and settled within a single transaction, without any delay between borrowing and repayment.
This synchronous handling is made possible by the concept of atomic composability, where all actions must either succeed or fail together.
Collateral-Free Capital
Flash loans are unique in that they do not require collateral or involve credit risk, as the loan is borrowed and repaid within the same transaction.
This makes flash loans highly capital-efficient and allows for significant leverage, a feature not commonly found in traditional financial markets.
Flash Loan Attacks
While flash loans offer speed and efficiency, they are not immune to exploitation.
Flash loan attacks refer to malicious activities where an attacker leverages a flash loan from a lending protocol to manipulate the market using various unauthorized techniques.
Flash loan attacks have gained attention due to their prominence in the rapidly growing DeFi space.
They have become a significant concern in 2021, resulting in substantial financial losses running into hundreds of millions of dollars.