Does a Flash Loan Exploit Directly Cause or Simply Leverage Existing Impermanent Loss?
A flash loan exploit does not directly cause impermanent loss, but it leverages the existing vulnerability created by the AMM's pricing mechanism and the resulting price divergence. Flash loans allow an attacker to borrow a large amount of capital, execute a massive swap to manipulate the pool's price, and then execute another action (like liquidating a vault or exploiting another protocol) before repaying the loan in the same transaction.
The large, rapid price change caused by the flash loan's swap maximizes the impermanent loss for the LPs during that brief moment, which is a side effect of the price manipulation, not the primary goal.
Glossar
Flash Loan
Mechanism ⎊ A flash loan is a unique, uncollateralized loan mechanism in decentralized finance that allows users to borrow assets for a very short duration, typically within a single blockchain transaction.
Impermanent Loss
LiquidityRisk ⎊ Impermanent Loss quantifies the temporary divergence in value between holding assets in a decentralized liquidity pool versus simply holding those same assets in a non-interest-bearing wallet, resulting from price movements between the deposited pair.
Flash Loan Exploit
Nature ⎊ A flash loan exploit represents a sophisticated attack vector in decentralized finance where malicious actors leverage the unique properties of flash loans to manipulate protocols for illicit gain.
Exploit
Vulnerability ⎊ Within cryptocurrency, options trading, and financial derivatives, a vulnerability represents a systemic weakness in a protocol, smart contract, or trading infrastructure that can be leveraged to gain an unfair advantage or inflict financial harm.