Crypto glossary

Flash Loan

A flash loan is a DeFi loan that is borrowed and repaid within a single blockchain transaction. No collateral is needed, because if the money is not paid back by the end of the transaction, the whole transaction is cancelled as if it never happened.

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Why no collateral is needed

Normal loans need collateral because the lender might not get paid back. Blockchain transactions are atomic: either every step succeeds or none does. A flash loan uses this. A lending protocol such as Aave lends you funds, your smart contract does whatever it wants with them, and at the end the loan plus a small fee must be back in the pool. If not, the transaction reverts and the lender never actually lost anything.

This means anyone who can write or use a smart contract can briefly control very large sums. You pay only the fee and gas, and only if the transaction succeeds; a failed attempt still costs gas.

Legitimate uses

Arbitrage is the classic case: buy a token cheaply on one exchange and sell it higher on another in the same transaction, repaying the loan from the profit. Flash loans are also used to refinance or close a DeFi loan in one step, swap the collateral behind a position, or self-liquidate a loan before the protocol does it with a penalty.

How attackers use them

Flash loans are not a hack in themselves, but they make attacks cheaper. An attacker borrows a huge amount, uses it to push the price in a thin liquidity pool, and exploits a protocol that reads its prices from that pool. The manipulated price lets them borrow or withdraw far more than they should, and they repay the flash loan and keep the difference. Many well-documented DeFi exploits since 2020 followed this pattern, often combined with a bug in the target's code or oracle.

What it means for users

As a regular user you will rarely take a flash loan yourself, but they shape the risks of protocols you use. A protocol relying on easily manipulated price sources, or with weak governance voting that can be bought for one block, is exposed. Robust oracles, time-weighted prices and audits reduce, but never remove, that risk.

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Frequently asked questions

Can I take a flash loan without coding?

Mostly no. Flash loans require a smart contract that runs all steps in one transaction, though some tools package common uses like collateral swaps.

What happens if a flash loan cannot be repaid?

The entire transaction reverts. The lender gets its money back automatically, and the borrower loses only the gas fee.

Are flash loans bad?

No. They are a neutral tool. They make arbitrage and refinancing efficient, but they also let attackers exploit weak protocols without needing their own capital.

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All glossary terms · Educational reference only — not investment, legal, tax or financial advice.