Flash Loans: The Instant Mega-Loans Undermining the Crypto Market

According to a recent report, flash loan attacks are on the rise. What are they, and what are the risks?

Imagine being able to take out a loan of almost unlimited size without putting up any collateral. There’s only one catch. You have to pay it back almost instantly. Sound strange? It probably does. But that is exactly what a flash loan is. As the name suggests, these loans take place almost instantaneously. (Think the DC Comic superhero, The Flash, who can travel at the speed of light.)

A recent report by De.Fi suggests that flash loans are on the rise and bad actors make use of them in an increasing number of exploits. In Q1 of this year, $200 million was lost through this style of exploit.

But why would someone want to take out a near-instantaneous loan? Well, like many things in crypto, it comes down to good returns.

Flash Loans and Flash Loan Attacks Explained

The logic of flash loans relies on arbitrage, the process of taking advantage of small price differences. Unlike other kinds of loans, flash loans do not require a lengthy approval process, so they can be executed quickly. “Given the low fees involved in the one-transaction loan, there is a huge potential for high returns,” explained Artem Bondarenko, Software Architect at De.Fi, in an interview with BeInCrypto. “For creditors of a flash loan, there are no risks as the loan gets returned right away. Otherwise, the transaction fails.”

In traditional finance, there is nothing exactly like a flash loan. It’s similar to a call option but with some significant differences. With a flash loan, you can use the borrowed money right away, while with a call option, you need to wait. Also, in traditional finance, transactions usually happen one at a time, whereas with flash loans, they happen in blocks. However, these short-term instruments are not completely without a downside, as De.Fi’s report outlines.

“A flash loan attack takes place when someone is able to borrow a huge amount in one place and use it to manipulate prices by buying or selling in large quantities, thereby influencing the price of an asset,” said Bondarenko. “Then using that change in price to exploit the opposite buying or selling on another si

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Author: Josh Adams

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