What Is a “Flash Loan” and How Does It Exploit Composability?
A flash loan is an uncollateralized loan that must be borrowed and repaid within the same blockchain transaction. It exploits DeFi's composability by allowing a user to execute a complex sequence of actions (e.g. arbitrage, liquidations) across multiple protocols instantly.
If the repayment fails at the end of the transaction, the entire sequence is reverted, leveraging the atomic nature of blockchain transactions.
Glossar
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.
Composability
Synergy ⎊ Composability within cryptocurrency, options, and derivatives signifies the ability to combine distinct financial primitives ⎊ such as decentralized exchanges, lending protocols, and options vaults ⎊ to create novel and complex financial instruments.
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.