What Is a Flash Loan? (DeFi Explained)

Definition

A flash loan is an uncollateralized loan that is borrowed and repaid within the same blockchain transaction.

How it works

Because the loan must be repaid before the transaction ends, no collateral is needed. If repayment fails, the whole transaction is reversed.

What they are used for

Flash loans are used for arbitrage, refinancing positions and other complex strategies that profit from price differences across protocols.

Why they are controversial

Attackers have used flash loans to manipulate prices and drain vulnerable protocols, making them a common tool in DeFi exploits.

What it means for users

Flash loans themselves are neutral tools, but they highlight the importance of using well-audited protocols.

Bottom line

Flash loans are a unique DeFi primitive that enable powerful strategies but also amplify risk when protocols have bugs.