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Learn what flash loans are, how they work without collateral, what they're legitimately used for, and how they've been used in DeFi exploits in 2026.
What Are Flash Loans? Uncollateralized Borrowing in a Single Transaction
A flash loan is a type of uncollateralized loan that must be borrowed and repaid within the same blockchain transaction. If the borrower does not repay the full amount plus a small fee by the end of the transaction, the entire transaction reverts as if it never happened.
This is only possible on blockchains because transactions are atomic: they either complete in their entirety or fail completely. A flash loan leverages this property to offer large loans with zero collateral requirement, because the loan never actually leaves the protocol's possession unless it is guaranteed to come back.
Flash loans were pioneered by Aave and have become a standard feature across major DeFi lending protocols. They can be for enormous amounts, sometimes tens or hundreds of millions of dollars, and cost only a small fee plus gas.
Legitimate Uses: Arbitrage, Collateral Swaps, and Self-Liquidation
Flash loans enable several genuinely useful financial operations that would otherwise be impossible or capital-intensive.
Arbitrage is the most common legitimate use. If ETH is priced at $3,000 on Uniswap and $3,015 on Sushiswap, a flash loan can borrow millions in stablecoins, buy ETH on Uniswap, sell it on Sushiswap, repay the loan, and pocket the difference, all in a single transaction. The capital requirement is only the gas cost.
Collateral swaps allow users to change their collateral on a lending platform without repaying and re-borrowing manually. Flash loan the debt amount, repay the loan to free the collateral, deposit new collateral, re-borrow, and repay the flash loan, all in one transaction.
Self-liquidation protection allows users whose health factor is deteriorating to use a flash loan to repay their debt before an external liquidator does, avoiding the liquidation penalty.
Flash Loan Attacks: How DeFi Protocols Get Exploited
Flash loans have also been the mechanism behind many high-profile DeFi exploits, and understanding how is important context for evaluating protocol security.
The core attack pattern: borrow a very large amount via flash loan, use that temporary capital to manipulate a price oracle or governance mechanism within the same transaction, exploit the resulting mispricing in another protocol, repay the flash loan, and keep the profit.
In the 2020 bZx attacks, a borrower used flash loans to manipulate the price of an asset on Uniswap (which bZx used as a price oracle), then exploited bZx's resulting mispriced loan conditions for profit. Similar attacks have drained other protocols.
The vulnerability is not flash loans themselves but reliance on manipulable price sources. Protocols using on-chain spot prices as oracles are vulnerable. Those using time-weighted average prices (TWAPs) or decentralized oracle networks like Chainlink are much more resistant.
Flash Loans and DeFi Protocol Security Design
The existence of flash loans has had a lasting and beneficial impact on how DeFi protocols are designed.
Security-conscious protocols now assume that any attacker has access to essentially unlimited capital for the duration of a transaction. This design assumption, sometimes called 'assume flash loan attacker,' leads to more robust security practices.
Time-weighted average price oracles instead of spot prices, multi-block oracle requirements, transaction cooldown periods, and careful ordering of protocol operations are all security design choices that address flash loan attack vectors.
For users, this design evolution means that the major DeFi protocols in 2026 are substantially more resilient to flash loan attacks than those of 2020 and 2021. Newer and less battle-tested protocols may not have applied these lessons as rigorously.
How to Use Flash Loans as a Developer or Advanced User
Flash loans are primarily a developer tool. Using them requires writing smart contracts that specify the operations to perform between borrowing and repaying.
Aave provides a clear developer interface for flash loans. A smart contract implementing Aave's IFlashLoanReceiver interface can borrow assets, perform operations in the executeOperation function, and repay the loan plus fee. The entire operation happens in one transaction.
For non-developers, some DeFi user interfaces abstract flash loan complexity for specific use cases like collateral swaps or debt refinancing. Defi Saver and similar platforms provide these tools with user-friendly interfaces that use flash loans under the hood.
The fee is typically 0.05 to 0.09 percent of the borrowed amount, making flash loans cost-effective for large arbitrage or refinancing operations that would otherwise require significant personal capital.
Flash Loans: Elegant Mechanism, Sharp Tool
Flash loans are a genuinely novel financial primitive that only exists on blockchains. The concept of borrowing unlimited capital for the cost of a transaction, with the loan enforced by code rather than collateral, has no equivalent in traditional finance.
For developers and advanced users, they enable efficient capital operations that would otherwise be prohibitively expensive or impossible. For the DeFi ecosystem, the existence of flash loan attackers has driven meaningful security improvements in protocol design.
For most users, understanding flash loans matters primarily for understanding DeFi exploit mechanics and appreciating why well-designed protocols use robust oracle systems and thoughtful security architecture.
This information, including any opinions and analyses, is for educational purposes only and does not constitute financial advice or recommendation. You should always conduct your own research before making any investment decisions and are solely responsible for your actions and investment decisions.
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