Flash Loans: Understanding the attacks that cost hundreds of millions

A Powerful Mechanism… but Dangerous

Flash loans represent a remarkable innovation in the DeFi ecosystem: instantly borrowing massive sums without providing any collateral, as long as everything is repaid within the same blockchain transaction. This is revolutionary for arbitrage and refinancing, but it has also opened the door to massive exploits.

How Attackers Exploit Flash Loans

The process is simple but formidable: a malicious actor mobilizes a large flash loan, uses it to destabilize prices on (DEX) liquidity pools, then profits from false information propagated to other protocols. Everything disappears in a single transaction — including the repayment of the flash loan.

Let’s take a concrete example: the attacker borrows 10 million USDC, artificially manipulates the value of a token on a decentralized exchange platform, exploits this to drain reserves from another platform that relies on distorted prices, repays the loan, and walks away with the difference in pocket.

Massive Losses Throughout History

bZx (2020): $1 million lost when prices were manipulated to bypass liquidation systems.

Harvest Finance (2020): $34 million volatilized in minutes through coordinated token price manipulation.

PancakeBunny (2021): $45 million in losses caused by price distortions on BUNNY and USDT.

These figures show that the problem is not just theoretical — it is a very real threat.

Why Protocols Remain Vulnerable

The three main weaknesses:

• Insufficiently reliable oracles: many protocols rely on price sources that are too easily manipulated
• Logical flaws: smart contracts do not always rigorously validate incoming data
• Lack of temporal safeguards: a single price point can be misleading; weighted averages over time are necessary

How to Defend: Solutions for Protocols

Integrate recognized oracles like Chainlink, which offer better resilience. Implement delay mechanisms — for example, use (Time-Weighted Average Price) (TWAP) to smooth anomalies. Validate user inputs and require multiple signatures for sensitive operations. Conduct regular audits of smart contracts.

Protect Your Capital: What Users Should Do

Avoid leaving large amounts idle in DeFi protocols without prior audit. Stay alert to announcements: in case of a detected security incident, immediately deactivate your funds. Favor platforms with proven track records and tested infrastructure.

The Lesson: Innovation but Vigilance

Flash loans perfectly illustrate the paradox of DeFi: a tool with enormous potential, but also a surface for attack. To avoid becoming a victim, it is essential to understand the mechanism and choose your DeFi partners wisely.