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Crypto Terms:  Letter F

What is Flash Loan?

Meaning:
Flash Loan - is a type of uncollateralized lending that is utilized across decentralized finance (DeFi) protocols based on the Ethereum network.
hard
4 minutes

Let's find out Flash Loan meaning, definition in crypto, what is Flash Loan, and all other detailed facts.

A flash loan has earned popularity throughout multiple Ethereum-based DeFi protocols.

Flash loans are a new sort of unprotected borrowing that may be obtained through DeFi networks. These loans are used by DeFi traders for a variety of profit-generating methods, including arbitrage and collateral swaps. It is considered a solution provided by the Aave platform.

So, flash loans are usually supported and funded by using lending protocols like CREAM or Aave. These offer single-transaction loans as a feature that allows them to be mixed with Uniswap or other similar dApps.

Besides, they do not need collateral since there is no risk associated with counterparty or credit.

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.

Speaking of traditional finance, there are two types of loans - secured and unsecured. Banks will offer their clients unsecured loans based on their credit history.

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.

This is where the idea of “secured loans” came from.

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.

Rather than providing collateral, the borrower has to pay back the funds in an instant.

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.

Instead, they must use the borrowed cash to repay the obligation and maybe keep any funds that are left.

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.

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 black hat tactics.

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.

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.

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.

OpenZeppelin Defender, for example, is a solution that allows project managers to spot smart contract flaws and other unusual activity, allowing them to respond fast and eliminate risks.

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.

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.

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.

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&rsquo;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.&nbsp;<\/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&rsquo;s the catch? Flash attackers get to keep all of the assets left for their own gains.&nbsp;<\/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&rsquo;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.&nbsp;<\/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>.&nbsp;<\/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&rsquo;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.&nbsp;<\/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}" :prev-section="{"id":355,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Flash_Crash","level":"easy","author_id":1,"created_at":"2023-06-19T06:58:59.000000Z","updated_at":"2023-12-06T03:06:20.000000Z","slug":"what-is-flash-crash","title":"What is Flash Crash?","section":"F","keyword":"Flash Crash","content":"<p>When&nbsp;<strong>the price<\/strong> of an asset drops drastically in a short period of time and then returns to the previous levels in the same amount of time it is referred to as a flash crash. In the <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-cryptocurrency/">cryptocurrency world, a flash crash can last from hours to minutes. Such flash crashes usually happen because of high-frequency trading.<\/p>\n<p>Extreme downward price swings are a natural part of the <strong>volatility<\/strong> of <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-digital-currency/">digital currencies<\/strong><\/a>. As a result of the intense selling pressures, crypto values experience quick changes, resulting in flash crashes in many situations.<\/p>\n<p>However, other industries, such as <strong>the stock and foreign exchange markets<\/strong>, also experience flash crashes. <a href=https://www.bitdegree.org/"https:////en.wikipedia.org//wiki//2015–2016_stock_market_selloff/" target=\"_blank\" rel=\"nofollow noindex noopener\"><strong>The July 2015 flash<\/strong><\/a>, when an effect on the New York Stock Exchange (NYSE) halted trading for over three hours, was one of the most notable stock market hits. Other examples include <strong>the 2014<\/strong> bond flash crash, which was triggered by <a href=https://www.bitdegree.org/"https:////en.wikipedia.org//wiki//Algorithmic_trading/" target=\"_blank\" rel=\"nofollow noindex noopener\"><strong>algorithmic trading<\/strong><\/a> systems, and <a href=https://www.bitdegree.org/"https:////en.wikipedia.org//wiki//2010_flash_crash/" target=\"_blank\" rel=\"nofollow noindex noopener\"><strong>the 2010 Dow crash<\/strong><\/a>, which was triggered by <a href=https://www.bitdegree.org/"https:////en.wikipedia.org//wiki//Spoofing_attack/" target=\"_blank\" rel=\"nofollow noindex noopener\"><strong><strong>spoofing<\/strong><\/strong><\/a>.<\/p>\n<p>In the crypto world, flash crashes are triggered differently. For instance, in 2021, <a href=https://www.bitdegree.org/"https:////www.bitdegree.org//crypto//buy-bitcoin-btc/">Bitcoin suffered a flash crash which wiped out around $310 billion from the digital currency market causing BTC liquidations <strong>worth $10 billion<\/strong>.<\/p>\n<p>This flash crash occurred as a result of blackouts in the region of Xinjiang in China, which is a place where some of the world&rsquo;s largest Bitcoin <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-is-mining-farm/">mining farms<\/strong><\/a> are located. According to further research, nearly half of Bitcoin&rsquo;s network outages were caused by <strong>power failures in this area<\/strong>, dropping the number of cryptographic hashes per second from 215 to 120 and causing a large selloff.<\/p>","definition":"a market condition where the price of an asset drops drastically in a short period of time.","status":"published","meta_title":"What is Flash Crash? Definition & Meaning | Crypto Wiki","meta_description":"Flash Crash meaning: Flash Crash - a market condition where the price of an asset drops drastically in a short period of time.","meta_keywords":null}" :model="{"id":414,"wikipedia_url":"https:\/\/en.wikipedia.org\/wiki\/Decentralized_finance","level":"hard","author_id":1,"created_at":"2023-06-19T06:58:59.000000Z","updated_at":"2023-12-06T03:21:49.000000Z","slug":"what-is-flash-loan","title":"What is Flash Loan?","section":"F","keyword":"Flash Loan","content":"<p>A flash loan has earned popularity throughout multiple <a href=https://www.bitdegree.org/"//crypto//buy-ethereum-eth/">Ethereum-based DeFi protocols.<\/p>\n<p>Flash loans are a new sort of unprotected borrowing that may be obtained through DeFi networks. These loans are used by DeFi traders for a variety of profit-generating methods, including arbitrage and collateral swaps. It is considered a solution provided by the Aave platform.<\/p>\n<p>So, flash loans are usually supported and funded by using lending protocols like CREAM or Aave. These offer single-transaction loans as a feature that allows them to be mixed with <a href=https://www.bitdegree.org/"https:////www.bitdegree.org//crypto//goon//uniswap/" target=\"_blank\" rel=\"nofollow noindex noopener\"><strong>Uniswap<\/strong><\/a> or other similar <a href=https://www.bitdegree.org/"//crypto//learn//crypto-terms//what-are-decentralized-applications-dapps/">dApps./n

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 &ldquo;secured loans&rdquo; 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,"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&rsquo;s degree on Economics, Politics &amp; Culture for the East Asia region, Aaron has written scientific papers with a comparative analysis of the differences between US&rsquo; Western and Japan&rsquo;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&rsquo;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 &amp; 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? The Pros & Cons","status":"published","modified_content":null},{"chapter_id":2,"order":4,"slug":"coin-vs-token","title":"Coin VS Token: How Do They Differ?","status":"published","modified_content":null},{"chapter_id":2,"order":5,"slug":"what-are-stablecoins","title":"What are Stablecoins, Altcoins & Wrapped Coins?","status":"published","modified_content":null},{"chapter_id":2,"order":6,"slug":"what-is-a-bitcoin","title":"Bitcoin: the Pioneer of the Crypto World","status":"published","modified_content":null},{"chapter_id":2,"order":7,"slug":"what-is-ethereum","title":"The Ultimate Blockchain for dApp Creation: Ethereum","status":"published","modified_content":null},{"chapter_id":2,"order":8,"slug":"what-is-cardano-in-crypto","title":"What is Cardano and What is It Used For?","status":"published","modified_content":null},{"chapter_id":2,"order":9,"slug":"what-is-shiba-inu-coin","title":"Shiba Inu: the Dogecoin Killer","status":"published","modified_content":null},{"chapter_id":2,"order":10,"slug":"what-is-solana-in-crypto","title":"Is Solana an Improved Version of Ethereum?","status":"published","modified_content":null},{"chapter_id":2,"order":11,"slug":"what-is-polkadot-in-crypto","title":"The Bridge Between Blockchains: Polkadot","status":"published","modified_content":null},{"chapter_id":2,"order":12,"slug":"what-is-polygon-in-crypto","title":"Polygon: the Essential Scaling Solution for Ethereum","status":"published","modified_content":null},{"chapter_id":2,"order":13,"slug":"what-is-luna-crypto","title":"The Bumpy Road of Terra (LUNA)","status":"published","modified_content":null},{"chapter_id":2,"order":14,"slug":"what-is-fantom-crypto","title":"Is Fantom (FTM) Yet Another Ethereum Killer?","status":"published","modified_content":null},{"chapter_id":2,"order":15,"slug":"what-is-aave-crypto","title":"Aave: Crypto Lending 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Standards","status":"published","modified_content":null},{"chapter_id":3,"order":5,"slug":"how-to-buy-crypto","title":"From Fiat to Crypto: How to Buy Crypto for the First Time","status":"published","modified_content":null},{"chapter_id":3,"order":6,"slug":"fiat-to-crypto","title":"Taking Profits: Turning Crypto Into Fiat","status":"published","modified_content":null},{"chapter_id":3,"order":7,"slug":"how-to-use-crypto","title":"You\u2019ve Got Crypto: What Can You Do With It?","status":"published","modified_content":null}]},{"id":4,"title":"Crypto Wallets","slug":"crypto-wallets","updated":false,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-crypto-wallets.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/crypto-wallets-101.jpg","rating":80,"sections":[{"chapter_id":4,"order":1,"slug":"what-is-a-crypto-wallet","title":"What is a Crypto Wallet?","status":"published","modified_content":null},{"chapter_id":4,"order":2,"slug":"hot-wallet-vs-cold-wallet","title":"Hot Wallet VS Cold Wallet: Which One to Pick?","status":"published","modified_content":null},{"chapter_id":4,"order":3,"slug":"non-custodial-wallet","title":"What are Non-Custodial Crypto Wallets?","status":"published","modified_content":null},{"chapter_id":4,"order":4,"slug":"what-is-metamask","title":"Metamask: The Leading Non-Custodial Wallet","status":"published","modified_content":null},{"chapter_id":4,"order":37,"slug":"how-safe-is-cryptocurrency","title":"The Key Crypto Wallet Safety Practices: How Safe Can Crypto Be?","status":"published","modified_content":null}]},{"id":5,"title":"NFTs","slug":"nfts","updated":null,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-nfts.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/nfts-101.jpg","rating":100,"sections":[{"chapter_id":5,"order":2,"slug":"how-to-trade-nfts","title":"NFT Trading: The Ins and Outs","status":"published","modified_content":null},{"chapter_id":5,"order":3,"slug":"buying-nft","title":"Tips and Tricks of Choosing the Right NFTs","status":"published","modified_content":null},{"chapter_id":5,"order":4,"slug":"how-to-store-nft","title":"How to Store NFTs: Best Practices","status":"published","modified_content":null},{"chapter_id":5,"order":5,"slug":"how-to-create-an-nft","title":"How to Create Your Own NFTs?","status":"published","modified_content":null},{"chapter_id":5,"order":6,"slug":"how-to-make-passive-money-with-nft","title":"Making Passive Money with NFTs","status":"published","modified_content":null}]},{"id":6,"title":"dApps & Defi","slug":"dapps-and-defi","updated":true,"chapter":"crypto\/assets\/crypto-book\/chapters\/learn-dapps.jpg","chapter_simple":"crypto\/assets\/crypto-book\/chapters-simple\/dapps-defi-101.jpg","rating":80,"sections":[{"chapter_id":6,"order":1,"slug":"what-are-nfts","title":"What are Non-Fungible Tokens 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