Flash Loan

A flash loan is a special type of uncollateralized loan that exists only within a single blockchain transaction. You can borrow any amount — potentially millions of dollars — without providing any collateral, as long as you repay the full amount, plus a small fee, before the transaction finishes. If you cannot repay within that same transaction, the entire sequence is reversed by the blockchain as if it never happened. No money is lost by the lender because the rules are enforced by code at the protocol level.

The reason this works on a blockchain is that a single transaction can contain dozens of steps — borrow, trade, arbitrage, repay — all executed atomically. “Atomically” means either all steps succeed together, or none of them happen at all. This guarantee is built into how blockchains process transactions. Flash loans exploit this property by saying: you can use our money for steps two through nine, as long as step ten sends it all back.

Flash loans are used legitimately for arbitrage (buying cheap in one place and selling high in another), for refinancing debt positions without bridging capital, and for liquidating under-collateralized positions. They are also used maliciously in what are called flash loan attacks (covered below). The existence of flash loans illustrates a profound idea: in DeFi, time and money interact in ways impossible in traditional finance.

Example: Imagine a magic rule at a casino: you can borrow $1,000,000 from the house with no paperwork, use it at any table in the building for the next 10 seconds, and if you return $1,000,100 at the end of those 10 seconds, the loan cost you nothing but the fee. If you fail to return it, all your bets are cancelled and the money teleports back to the house. No risk to the house. The borrower either profits or the whole thing never happened.