What is Flash Loan Attack?
Let's find out Flash Loan Attack meaning, definition in crypto, what is Flash Loan Attack, and all other detailed facts.
In essence, flash loan attacks exploit smart contracts used in decentralized finance (DeFi). It’s done by attacking smart contracts that are responsible for flash loans. Then the attackers are able to take the assets and turn them into their own profit.
In order to pull off a flash loan attack, the cybercriminals must first borrow a large sum. Next, they have to use that loan to buy assets with arbitrage, and then repay the loan. What’s the catch? Flash attackers get to keep all of the assets left for their own gains.
The key element that allows this kind of criminal activity to happen is the permissionless decentralized finance protocols that are completely run by smart contracts. Flash loans are taken out through smart contracts which don’t require collaterals or third-party overseers. The lack of intermediaries is what makes decentralized finance platforms the perfect victim for this type of attack.
There have been quite a few flash loan attacks, even though the process of setting up such an attack is extremely complex and difficult.
A lot of flash loan attackers try to gain assets directly from other decentralized finance protocols. An example of this is a flash attack on a lending DApp - dYdx. The attackers took out a loan on this platform and sent their borrowed sum to Compound and Fulcrum. They used the Fulcrum platform to short ETH against Wrapped Bitcoin (WBTC). At the same time, they took out a loan of WBTC on Compound. Once WBTC’s price reached sky high, the attackers flipped their WBTC on Uniswap, repaid all of the loans, and kept the remaining ETH.
Another example is an attack on DeFi protocol bZx where the attackers converted their loan into sUSD stablecoins. The hackers placed a big buy order on the sUSD stablecoin, thus doubling its value and manipulating the market. Then they used their sUSD stablecoin to take out an even bigger loan. In the end, the attackers paid all of the loans and got to keep the leftover assets for themselves.
PancakeBunny - a popular Binance Smart Chain-based yield farming aggregator had become a victim of a flash loan attack in 2021. The malicious criminals began their attack by borrowing a lot of BNB on PancakeBunny. By doing this, they were able to manipulate the price of Bunny tokens and Binance USD stablecoin at the same time. In turn, as the attackers dropped their Bunny on the market, it crashed.
Besides, they do not need collateral since there is no risk associated with counterparty or credit.<\/p>\n<p>In regards to that, flash loans are super capital-efficient since they provide big amounts of leverage. This type of capital efficiency can only be achieved in DeFi and not in the traditional financial marketplaces.<\/p>\n<p>Speaking of traditional finance, there are two types of loans - <strong>secured and unsecured<\/strong>. Banks will offer their clients unsecured loans based on their credit history.<\/p>\n<p>Lenders frequently require borrowers to put up collateral in order to assure that if the borrower is unable to repay the loan, the lender will still be able to recover their money. Even if the client has an excellent credit score, there are no assurances that the bank would grant a loan.<\/p>\n<p>This is where the idea of “secured loans” came from.<\/p>\n<p>So, an unsecured loan is when no collateral is needed. This absence of collateral does not imply that the flash loan lender will not get their money back. It simply indicates that it will just be sent back in a different manner.<\/p>\n<p>Rather than providing collateral, the borrower has to pay back the funds in an instant.<\/p>\n<p>A flash loan allows a customer to take as much as they desire without incurring any upfront fees. For instance, if someone wants to borrow $20,000 in ETH, a lending protocol will offer it to them quickly, but this does not indicate that the funds now belong to the borrower.<\/p>\n<p>Instead, they must use the borrowed cash to repay the obligation and maybe keep any funds that are left.<\/p>\n<p>In order for this to function, the operation must be fast, and the debt must be repaid to the protocol as soon as possible, otherwise, the transaction will be canceled. A blockchain enforces the loan pledge, therefore a decentralized ledger does not require collateral from the user.<\/p>\n<p>Even though the transactions are quick, flash loans are vulnerable to manipulation. Flash loan attacks are a sort of DeFi attack in which a malicious user acquires a flash loan through a lending protocol and distorts the market to their advantage utilizing various types of <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-black-hat-hacker/">black hat<\/strong><\/a> tactics.<\/p>\n<p>The cheapest to perform and the easiest to get away with are the flash loan attacks. Since DeFi skyrocketed in popularity, these types of attacks have become more frequent. To specify, there are already hundreds of millions of dollars in losses. Likewise, attackers of flash loans depend on devising new ways to manipulate the market and also adhering to the blockchain laws.<\/p>\n<p>Rather than relying on a single DEX for its price feed, DeFi platforms might use decentralized pricing prophets like Chainklink and Band Protocol to reduce the attack vector for flash loan assaults.<\/p>\n<p>One of the most crucial factors that allow malicious actors to get away with flash loan assaults is the latency in response time from DeFi platform manufacturers. Automated tools should be employed to prevent this from taking place.<\/p>\n<p><strong>OpenZeppelin Defender,<\/strong> for example, is a solution that allows project managers to spot <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-smart-contract/">smart contract<\/strong><\/a> flaws and other unusual activity, allowing them to respond fast and eliminate risks.<\/p>\n<p>In addition, flash loans are fundamentally forms of loans, with special characteristics. They were created as part of a larger trend to make financial instruments more available to the general public, eliminating the necessity of middlemen such as banks and other traditional financial organizations.<\/p>\n<p>Obtaining a satisfying loan is a lengthy procedure. In a usual case, a borrower is required to repay the loan over a period of months or perhaps years. However, this is not the case with flash loans. It is instantaneous with flash loans.<\/p>\n<p>The smart contract for the loan must be executed in the same transaction that it is leased out, which implies that the borrower must call on other smart contracts to make quick transactions with the loaned funds before the transaction closes.<\/p>","definition":"is a type of uncollateralized lending that is utilized across decentralized finance (DeFi) protocols based on the Ethereum network.","status":"published","meta_title":"What is Flash Loan? Definition & Meaning | Crypto Wiki","meta_description":"Flash Loan meaning: Flash Loan - is a type of uncollateralized lending that is utilized across decentralized finance (DeFi) protocols based on the Ethereum network.","meta_keywords":null}" :model="{"id":349,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Decentralized_finance","level":"medium","author_id":1,"created_at":"2023-06-19T06:58:59.000000Z","updated_at":"2023-12-06T02:11:37.000000Z","slug":"what-is-flash-loan-attack","title":"What is Flash Loan Attack?","section":"F","keyword":"Flash Loan Attack","content":"<p>In essence, <strong>flash loan attacks exploit <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-smart-contract/">smart contracts<\/a><\/strong> used in <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-defi/">decentralized finance (DeFi)<\/strong><\/a>. It’s done by attacking smart contracts that are responsible for flash loans. Then the attackers are able to take the assets and turn them into their own profit. <\/p>\n<p>In order to pull off a flash loan attack, the cybercriminals must first borrow a large sum. Next, they have to use that loan to buy assets with arbitrage, and then repay the loan. What’s the catch? Flash attackers get to keep all of the assets left for their own gains. <\/p>\n<p>The <strong>key element that allows this kind of criminal activity to happen is the permissionless decentralized finance protocols<\/strong> that are completely run by smart contracts. Flash loans are taken out through smart contracts which don’t require collaterals or third-party overseers. The <strong>lack of intermediaries<\/strong> is what makes decentralized finance platforms the perfect victim for this type of attack. <\/p>\n<p>There have been quite a few flash loan attacks, even though <strong>the process of setting up such an attack is extremely complex and difficult<\/strong>. <\/p>\n<p>A lot of flash loan attackers try to gain assets directly from other decentralized finance protocols. An example of this is a flash attack on a lending DApp - dYdx. The attackers took out a loan on this platform and sent their borrowed sum to Compound and Fulcrum. They used the Fulcrum platform to short ETH against Wrapped Bitcoin (WBTC). At the same time, they took out a loan of WBTC on Compound. Once WBTC’s price reached sky high, the attackers flipped their WBTC on Uniswap, repaid all of the loans, and kept the remaining ETH.<\/p>\n<p>Another example is an attack on DeFi protocol bZx where the attackers converted their loan into sUSD <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-stablecoin/">stablecoins. The hackers placed a big buy order on the sUSD stablecoin, thus doubling its value and manipulating the market. Then they used their sUSD stablecoin to take out an even bigger loan. In the end, the attackers paid all of the loans and got to keep the leftover assets for themselves. <\/p>\n<p>PancakeBunny - a popular Binance Smart Chain-based <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-yield-farming/">yield farming<\/strong><\/a> aggregator had become a victim of a flash loan attack in 2021. The malicious criminals began their attack by borrowing a lot of BNB on PancakeBunny. By doing this, they were able to manipulate the price of Bunny tokens and Binance USD stablecoin at the same time. In turn, as the attackers dropped their Bunny on the market, it crashed.<\/p>","definition":"Flash loan attacks depend on exploiting a smart contract in order to make a profit.","status":"published","meta_title":"What is Flash Loan Attack? Definition & Meaning | Crypto Wiki","meta_description":"Flash Loan Attack meaning: Flash Loan Attack - Flash loan attacks depend on exploiting a smart contract in order to make a profit.","meta_keywords":null,"author":{"id":1,"user_id":1,"created_at":"2023-05-03T14:30:55.000000Z","updated_at":"2023-05-11T07:18:20.000000Z","title":"Editor-In-Chief","slug":"aaron-s-editor-in-chief","description":"<p>Having completed a Master’s degree on Economics, Politics & Culture for the East Asia region, Aaron has written scientific papers with a comparative analysis of the differences between US’ Western and Japan’s Collective forms of capitalism, 1945-2020.<\/p>\n<p>With close to a decade of experience in the FinTech industry, Aaron understands all of the biggest issues and struggles that crypto enthusiasts face. He’s a passionate analyst who is concerned with data-driven and fact-based content, as well as that which speaks to both Web3 natives and industry newcomers.<\/p>\n<p>Aaron is the go-to person for everything and anything related to digital currencies. With a huge passion for blockchain & Web3 education, Aaron strives to transform the space as we know it, and make it more approachable to complete beginners.<\/p>\n<p>Aaron has been quoted by multiple established outlets, and is a published author himself. Even during his free time, he enjoys researching the market trends, and looking for the next supernova.<\/p>","user":{"id":1,"first_name":"Aaron","last_name":"S.","email":"aaron@bitdegree.org","email_sanitized":"aaron@bitdegree.org","email_verified_at":"2023-12-01T09:40:20.000000Z","must_verify_email":false,"is_registered_with_wallet":false,"status":"active","country":"LT","last_connected_ip":"88.119.132.125","image_id":2641,"referral_token":"05TMu2NysXOCn525","referred_by":null,"created_at":"2023-05-03T14:30:55.000000Z","updated_at":"2024-01-09T15:22:21.000000Z","full_name":"Aaron S."}}}" :chapter-list="[{"id":1,"title":"Blockchain","slug":"blockchain","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-blockchain.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/blockchain-101.jpg","rating":100,"sections":[{"chapter_id":1,"order":1,"slug":"what-is-blockchain","title":"What is the Blockchain?","status":"published","modified_content":null},{"chapter_id":1,"order":2,"slug":"decentralized-blockchain","title":"Anonymous & Decentralized Blockchains: The Cornerstone of Crypto","status":"published","modified_content":null},{"chapter_id":1,"order":3,"slug":"blockchain-transaction","title":"What is a Blockchain Transaction in Crypto?","status":"published","modified_content":null},{"chapter_id":1,"order":4,"slug":"crypto-fees","title":"The Different Types of Crypto Fees Explained","status":"published","modified_content":null},{"chapter_id":1,"order":5,"slug":"what-is-bridging-in-crypto","title":"The Key Notion Behind the Concept of Bridging in Crypto","status":"published","modified_content":null},{"chapter_id":1,"order":6,"slug":"types-of-blockchains","title":"Different Types of Blockchains: What to Look Out For?","status":"published","modified_content":null}]},{"id":2,"title":"Cryptocurrencies","slug":"cryptocurrencies","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-cryptocurrencies.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/cryptocurrencies-101.jpg","rating":100,"sections":[{"chapter_id":2,"order":1,"slug":"what-is-a-cryptocurrency","title":"What is a Cryptocurrency?","status":"published","modified_content":null},{"chapter_id":2,"order":2,"slug":"how-does-cryptocurrency-work","title":"How Does Cryptocurrency Work?","status":"published","modified_content":null},{"chapter_id":2,"order":3,"slug":"is-cryptocurrency-a-good-investment","title":"Is Cryptocurrency a Good Investment? 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