What Is a Flash Loan?

A flash loan lets you borrow crypto — sometimes millions of dollars worth — without putting up any collateral. The catch: you have to borrow it and pay it back inside a single blockchain transaction, or the entire thing never happened.

That's possible because of how transactions work on-chain. A transaction either fully succeeds or fully reverts as if it were never sent. A flash loan protocol exploits that all-or-nothing property: it lends you funds at the start of the transaction, lets your code do whatever it wants with them, and checks at the very end whether the loan (plus a small fee) has been repaid. If not, the whole transaction — including the loan itself — is undone. There's no default risk for the lender, because an unpaid loan simply never existed.

Flash loans aren't free money; you need a reason the borrowed funds are worth more to you for one transaction than the fee costs. Common legitimate uses:

• Arbitrage: buy an asset cheap on one exchange and sell it higher on another, all within the same transaction, using borrowed capital instead of your own.

• Collateral swaps: replace the collateral backing a loan without having to close and reopen the position.

• Self-liquidation: pay off your own undercollateralized loan before a liquidator does, avoiding the liquidation penalty.

Flash loans have also funded some of DeFi's largest exploits. Because they offer effectively unlimited capital with no upfront cost, attackers use them to briefly manipulate a market — for example, distorting a thinly-traded pool's price just long enough to trick a lending protocol that reads prices from that pool. The attacker profits, repays the loan, and walks away in one transaction, all before anyone can react.

Flash loans are a uniquely on-chain financial primitive: instant, uncollateralized borrowing that only works because a blockchain transaction can be perfectly undone if the rules aren't met. They're a powerful tool for legitimate arbitrage and position management — and a reminder of why protocols that rely on a single, easily-moved price source are playing with fire.