Why Do Flash Loan Attacks Occur in DeFi Ecosystem?

Why Do Flash Loan Attacks Occur in DeFi Ecosystem?

Defi loans help borrowers to purchase assets that are of high value without having the prerequisite of providing any collateral. Studies suggest that flash loan attacks are here to stay and can get increasingly severe with time.  

Are Flash Loans Risk-Free

Traditional lenders take on two forms of risk: default risk and liquidity risk. The first one occurs when the borrower runs away with the money. The second manifests when a lender lends out too many of its assets, doesn't receive timely repayments, becomes unexpectedly illiquid, and fails to meet its obligations. 

Flask loans mitigate both of these risks. In simple terms, a flash loan helps you to borrow as much money as you want for a single transaction. But, the catch is you must pay the amount back at the end of the transaction. Otherwise, it will automatically roll back your transaction. 

Recent Flash Loan Attack

Flash loans are gaining popularity. Recently, two hackers have utilized flash loans to attack the margin trading protocol. The first attack was for $350,000, followed by a copy at an attack of $600,000.

Investors have described these attacks to be magnificent. In each of these attacks, a hacker instantaneously borrowed vast amounts of ETH, threaded it through a chain of vulnerable on-chain protocols, and extracted vast sums of money from stolen assets, followed by paying back their ETH loans.  This was conducted in a single Ethereum transaction. 

The identity of the attackers or the location from where they attacked is still unknown. Both hackers started with nothing and successfully walked away with thousands of dollars in value. Neither of the attackers has left any traces that will help to identify them. 

Why Are Flash Loan Attacks Rising

Firstly, many attacks require a large amount of up-front capital, which is not true for flash loan attacks.

Secondly, flash loan attacks help to reduce the shame on the attackers. For example, if you want to manipulate Oracle with $10 million Ether, even if you own enough capital, you will never want to risk it. Your ETH will get tainted, and exchanges can reject deposits.

Overall, it is extremely risky! But when you take a flash loan of $10 million, no one cares. The loan comes from the collateral pool of dYdX; thus, it is not considered tainted – any taint on the dYdX kind of disappears. 

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