What Is a ‘Flash Loan Attack’ and How Does It Exploit DEX Protocols?
A flash loan attack exploits decentralized finance (DeFi) protocols by using an uncollateralized loan, which must be repaid within the same blockchain transaction. The attacker uses the borrowed funds to manipulate the price of an asset on a decentralized exchange (often by draining liquidity) and then executes a profitable trade, repaying the loan instantly.
The entire sequence happens in one atomic transaction, leaving no time for intervention.
Glossar
Decentralized Finance
Architecture ⎊ Decentralized Finance, or DeFi, fundamentally reimagines traditional financial infrastructure through blockchain technology, specifically leveraging smart contracts to automate and execute financial agreements without intermediaries.
Price Manipulation
Deception ⎊ ⎊ Price manipulation within cryptocurrency, options, and derivatives markets involves intentional actions designed to create artificial movements in the price of an asset, deviating from legitimate supply and demand forces.
Decentralized Exchange
Architecture ⎊ A decentralized exchange (DEX) fundamentally diverges from traditional order book exchanges through its reliance on smart contracts and blockchain technology to facilitate peer-to-peer trading, eliminating the need for a central intermediary.
Flash Loan Attack
Exploitation ⎊ A flash loan attack represents a market manipulation technique enabled by decentralized finance (DeFi) protocols, specifically leveraging the ability to borrow substantial capital without collateral requirements, contingent upon full repayment within a single transaction block.
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.