How Do Flash Loan Attacks Differ from Legitimate Flash Loan Arbitrage?
The key difference lies in intent and mechanism. Legitimate flash loan arbitrage exploits natural price differences between markets to make a profit.
A flash loan attack, however, exploits vulnerabilities in a DeFi protocol's smart contract. The attacker uses the massive capital from a flash loan to manipulate prices or other logic within the vulnerable protocol, with the goal of draining its funds, rather than profiting from a simple trade inefficiency.
Glossar
Flash Loans
Mechanism ⎊ Flash loans are a type of uncollateralized loan in decentralized finance (DeFi) that must be borrowed and repaid within the same blockchain transaction.
Flash
Execution ⎊ The term "Flash" within cryptocurrency derivatives, options trading, and broader financial engineering contexts denotes a rapid, often automated, trading strategy exploiting fleeting market inefficiencies.
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.
Price Oracle Manipulation
Exploit ⎊ Price Oracle Manipulation refers to the deliberate act of influencing the data reported by a price feed mechanism to gain an unfair advantage in a smart contract execution, commonly seen in flash loan attacks targeting undercollateralized DeFi positions.
Legitimate Flash Loan Arbitrage
Arbitrage ⎊ Legitimate flash loan arbitrage exploits fleeting price discrepancies across decentralized exchanges (DEXs) using automated, short-lived loans.
Flash Loan Attacks
Attacks ⎊ Flash Loan Attacks exploit the nature of uncollateralized, atomic loans to manipulate asset prices temporarily on a single blockchain transaction, allowing the attacker to profit from arbitrage or oracle manipulation before repaying the loan.