Flash loan

How does it work?

A single blockchain transaction can contain many steps. A developer writes a smart contractSmart contractA program that runs on a blockchain and automatically carries out what it was written to do once certain conditions are met. that takes the loan, uses the money and repays it, all in one transaction. Either every step succeeds or none of them does.

Aave and other lending services offer these loans. On Aave the fee started at 0.05% of the amount, but it can be changed by a vote. Common uses:

• Arbitrage: buying where the price is lower and selling where it is higher, without having the money yourself.
• Refinancing: repaying a loan in one place, freeing the collateral and moving the loan elsewhere.
• Liquidations: repaying another user's debt in a LiquidationLiquidationWhen a loan or leveraged position is closed automatically because the collateral or margin no longer covers the debt. and receiving the collateral in return.

What to keep in mind

A flash loan is a developer's tool, not something ordinary people use directly. Flash loans have also been used in attacks. With a huge amount of borrowed money inside one transaction, an attacker can, for example, push around a price that an OracleOracleA service that brings outside information, such as prices or weather data, into smart contracts on a blockchain. reads from a small exchange, or buy temporary voting power.

In April 2022 an attacker used a flash loan to exploit the governance system of a project called Beanstalk. According to Beanstalk, about US$77 million of users' assets was taken. The weakness lay in the system that was attacked, but the loan made the attack possible without any money of the attacker's own.