Flash Loan
What Is a Flash Loan
A flash loan is an innovative financial tool in decentralized finance (DeFi) that allows users to borrow funds without providing collateral, as long as the loan is repaid within the same blockchain transaction. This is made possible through smart contracts, which automatically enforce repayment conditions. If the borrower fails to repay the loan during the transaction, the smart contract reverses the entire process, ensuring the lender faces no risk of loss.
Flash loans are popular for high-risk, high-reward strategies like arbitrage, where users take advantage of price differences across platforms, refinancing debt, or swapping collateral. They are useful for traders and developers who need quick access to temporary liquidity for complex transactions. However, the same features that make flash loans powerful have also made them a target for exploitation. Malicious actors have used flash loans to manipulate markets or exploit vulnerabilities in poorly designed protocols, leading to significant losses and emphasizing the importance of robust smart contract security.