Flash Loan Economics

The Magic of Flash Loans

A flash loan lets you borrow any amount of crypto with zero collateral, on the condition that you repay it within the same transaction. If you can't repay, the entire transaction reverts and it's as if the loan never happened. This is possible because Ethereum transactions are atomic — either everything succeeds or everything reverts. Aave, MakerDAO's Multi-Collateral DAI, Uniswap V3 (via flash swaps), and several other protocols offer flash loans. Fees are tiny (~0.05-0.09%); the only real cost is gas.

What People Use Them For — Legitimate Cases

**Arbitrage**: borrow $1M USDC, buy ETH cheap on DEX A, sell expensive on DEX B, repay loan + fee, keep profit. Capital-efficient because you used $0 of your own money. **Collateral swaps**: you have an Aave loan collateralised by ETH and want to switch to wBTC collateral — flash-loan wBTC, swap your ETH collateral for wBTC, repay the flash loan. **Self-liquidation**: instead of waiting for someone else to liquidate your CDP (and pay the penalty), use a flash loan to repay your own debt and close cleanly. **Refinancing**: move debt between lending protocols to capture better rates without needing the capital sitting idle.

What People Use Them For — Exploits

The same atomicity that makes flash loans useful also makes them an exploit amplifier. Most major DeFi exploits in the past few years used flash loans somewhere in the attack: bZx, Cream Finance (multiple times), Mango Markets, Euler Finance, Beanstalk. The pattern: borrow a massive amount, manipulate something (oracle, governance, price), profit from the manipulation, repay the loan, walk away with the profit. Flash loans turn 'attacker needs $100M of capital' into 'attacker needs gas money plus a vulnerable target.'

• Borrow with zero collateral; repay in the same transaction or it reverts
• Legitimate uses: arbitrage, collateral swaps, refinancing, self-liquidation
• Exploit uses: oracle manipulation, governance attacks, vulnerability amplification
• Fees are negligible (~0.05-0.09%) — the cost is gas plus opportunity