Overview
A flash loan is an uncollateralized loan in DeFi that must be borrowed and repaid within the same blockchain transaction. Because the entire operation is atomic, the lender's funds are never exposed: if the borrower fails to repay, the transaction is reverted as if it never happened. Flash loans enable capital-efficient strategies that require large sums for only a moment.
How It Works
A borrower calls a lending protocol that dispenses funds, uses them in a series of steps, and then returns them with a fee, all inside one transaction. The protocol checks at the end that the loan is fully repaid; if not, the whole transaction reverts. This lets anyone use enormous capital without collateral, as long as the strategy's profit exceeds the flash loan fee.
Why It Matters
Flash loans democratize sophisticated DeFi strategies: arbitrage, liquidations, and collateral swapping can be executed by anyone without holding the capital upfront. They are also a lens into systemic risk, since exploits have used flash loans to manipulate oracles and drain protocols. Their existence shows both the power and the fragility of composable on-chain finance.
Related Concepts
Flash loans are a DeFi primitive used alongside AMM arbitrage and MEV strategies. They interact with Oracles (as manipulation targets) and with protocol security in general.