What Is a ‘Flash Loan’ and How Is It Used for High-Capital, Single-Transaction Arbitrage on DEXs?

A flash loan is a unique feature in decentralized finance (DeFi) that allows a user to borrow a very large amount of cryptocurrency with no upfront collateral. The critical condition is that the loan must be borrowed and repaid within the same blockchain transaction.

Arbitrageurs use flash loans to borrow massive capital, execute a multi-step arbitrage trade across different DEXs, and then repay the loan with a portion of the profit, all in a single, atomic transaction. If the repayment fails for any reason, the entire transaction is reversed as if it never happened.