How do flash loans work and what risks do they introduce?
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2 Answers
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I first toyed with flash loans in DeFi. You borrow funds for the length of one transaction, do something like arbitrage, then repay in the same block or the whole thing reverts. The appeal is no collateral, but the risks are real: you must price everything perfectly and pay high gas; a mistimed step or flawed contract can wipe you out. MEV/front-running, oracle gaps, and platform bugs are common attack surfaces.
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I first played with a tiny flash loan on a testnet to see how it fits. In a flash loan you borrow funds with no collateral and must repay everything in the same transaction. If any step fails, the whole thing reverts, so you don’t lose the lender’s money, the risk is on you if the plan fails. People use them for quick arbitrage, collateral swaps, or liquidations, all in one go.
From my experiments there are real risks: smart-contract bugs, oracle manipulation, and slippage that wipe out profit; high gas costs can eat tiny margins; if prices move mid-transaction you can fail and still pay gas. Best practice: practice on testnets, keep loan size tiny, map a deterministic path, and have a fallback plan.
From my experiments there are real risks: smart-contract bugs, oracle manipulation, and slippage that wipe out profit; high gas costs can eat tiny margins; if prices move mid-transaction you can fail and still pay gas. Best practice: practice on testnets, keep loan size tiny, map a deterministic path, and have a fallback plan.
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