What Is Flash Loan?
A flash loan is an uncollateralized loan that is borrowed and repaid within a single blockchain transaction. If the loan isn't repaid by the end of the transaction, the entire operation reverts as if it never happened — the lender bears zero risk. This enables massive capital deployment (millions of dollars) with zero upfront capital.
How Flash Loan Works
Flash loans are enabled by blockchain atomicity: every operation within a transaction either succeeds entirely or fails entirely. A flash loan transaction might: borrow $50M → exploit a price difference across DEXs → repay $50M + fee → pocket the profit. If any step fails (e.g., the arbitrage isn't profitable enough), the entire transaction reverts and only the gas fee is lost.
Why It Matters for Traders
Flash loans are a powerful tool for arbitrageurs and liquidators who can execute profitable strategies with zero capital risk. However, they've also been the mechanism behind many DeFi exploits — attackers use flash loans to temporarily manipulate oracle prices or exploit logic bugs in protocols. Understanding flash loans helps traders recognize when unusual market activity (sudden liquidity shifts, oracle deviations) might be flash loan-driven.