Flash Loan
By Menno — 13 years in crypto, 3 bear markets survived, zero paid promotions
Last updated: March 2026
A flash loan is an uncollateralized DeFi loan that must be borrowed and repaid within a single blockchain transaction. If the borrower can't repay, the entire transaction reverts — making it risk-free for lenders.
Flash loans are uncollateralized loans that exist only within a single blockchain transaction block. They are borrowed, used, and repaid — all atomically (either all steps succeed or none do).
How flash loans work: 1. You request to borrow $10M USDC from Aave 2. Within the same transaction, you execute your strategy 3. At the end of the transaction, you repay $10M + fee ($900 for a 0.09% fee) 4. If you can't repay, the entire transaction reverts — Aave never loses money
Legitimate uses: - Arbitrage: buy an asset cheap on DEX A, sell higher on DEX B, repay loan, keep profit - Collateral swaps: change the collateral type on a lending position without closing it - Self-liquidation: close an underwater position in one transaction - Protocol testing: security researchers use flash loans to test protocol vulnerabilities
Flash loan attacks: Flash loans were famously used in numerous DeFi exploits ($600M+ total lost), where attackers borrow enormous sums to manipulate on-chain price oracles, extract value, then repay — all in one transaction. This exposed oracle manipulation vulnerabilities in many early DeFi protocols.
Flash loans are a DeFi primitive that doesn't exist in traditional finance — they demonstrate how smart contracts enable novel financial operations impossible in legacy systems.
Frequently Asked Questions
Can a normal investor use flash loans?
Flash loans require programming knowledge — you need to write a smart contract that executes your strategy within a single transaction. Non-technical users can access flash loan arbitrage through specialized interfaces like DeFi Saver or Instadapp, which abstract the complexity.
Are flash loans legal?
Flash loans themselves are legal DeFi tools. Using them to exploit protocol vulnerabilities (flash loan attacks) is illegal in most jurisdictions, though prosecution is challenging given the pseudonymous nature of blockchain activity.
Related Terms
DeFi Lending
DeFi lending allows crypto holders to earn interest by depositing assets into lending protocols, while borrowers access loans by providing overcollateralized crypto as security — all automated by smart contracts with no bank required.
DeFi (Decentralized Finance)
DeFi is a category of financial services built on blockchain technology that operates without traditional intermediaries like banks. It includes lending, borrowing, trading, and earning yield through smart contracts.
Smart Contract
A smart contract is a self-executing program stored on a blockchain that automatically enforces the terms of an agreement when predefined conditions are met, without needing a middleman.
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