What is Flash Loan?
Crypto Glossary Definition
An uncollateralized loan that is both created and destroyed within a single transaction. Can be used by developers to exploit a system or capitalize on arbitrage opportunities.
Why Flash Loan Matters
A flash loan lets a borrower take out an uncollateralized loan and repay it within the same blockchain transaction — if it isn't repaid by the end of that transaction, the entire loan is automatically reversed. They're a legitimate DeFi tool, but they've also been the mechanism behind several high-profile exploit attacks on lending protocols.
Flash Loan in Practice
A DeFi arbitrageur notices that a particular token is trading at a slightly different price on two decentralized exchanges at the same moment, a gap large enough to profit from if she could buy on the cheaper exchange and immediately sell on the pricier one. The catch is that she doesn't have enough capital sitting idle to make the trade worthwhile. Instead, she writes a smart contract that takes out a flash loan, borrowing a large sum with no collateral, buying the token on the first exchange, selling it on the second, and repaying the loan plus a small fee, all within a single blockchain transaction. If every step succeeds and the loan is fully repaid by the end of that transaction, she pockets the price difference as profit; if any step fails or she can't repay in time, the entire transaction reverts automatically as though it never happened, and no money actually changes hands. This all-or-nothing design is what makes flash loans safe for lenders despite requiring zero collateral. It's also, less happily, what has made them a favorite tool for attackers, who use the same borrowed capital not for arbitrage but to manipulate a protocol's price oracle or exploit a logic flaw, all funded by money they never truly had to risk.
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