Flash loan

A flash loan is an uncollateralised loan in DeFi that must be borrowed and repaid within the same blockchain transaction. If the borrower cannot repay by the end of the transaction, the whole transaction is reversed as if it never happened, so the lender takes no credit risk. Aave popularised the idea in 2020.

Because they need no collateral, flash loans let anyone briefly control millions of dollars. Legitimate uses include arbitrage between exchanges, refinancing a loan from one protocol to another and closing positions efficiently. The borrower pays a small fee.

Flash loans are also a favourite tool in DeFi exploits. Attackers borrow huge sums to manipulate a thinly traded pool's price, trick a protocol that relies on that price, extract funds and repay the loan, all in a single transaction. The flash loan is not the bug itself; it amplifies weaknesses such as poorly designed price oracles. Well-designed protocols use robust oracles that resist this kind of manipulation.