Flash Loans: Power & Risk in One Transaction

[Chawla Solutions]

Flash loans are a powerful yet controversial innovation in DeFi. These instant, no-collateral loans must be borrowed and repaid within a single blockchain transaction usually within one block.
Their primary appeal lies in advanced financial strategies:

• DEX arbitrage: Exploiting price differences across decentralized exchanges.

• Liquidity cycling: Shuffling funds between protocols to maximize returns.

• Protocol testing: Even executing attacks on poorly designed smart contracts.

But with great power comes great risk. Flash loans have been weaponized in several major DeFi exploits, resulting in hundreds of millions in losses. Malicious actors can borrow massive liquidity, manipulate token prices or governance votes, drain assets, and repay the loan all within one block, leaving protocols helpless.
The real danger is how fast liquidity challenges smart contract security. Many protocols don’t anticipate such sudden behavior, opening them up to reentrancy bugs, price oracle manipulation, and timing attacks.
If you’re a DeFi developer, flash loan safety must be part of your audit checklist. Relying on assumptions about transaction timing, token balance, or “normal” user behavior is no longer safe.
The good news? When used ethically, flash loans unlock capital efficiency and innovation. When misused, they expose the fragility of unprepared protocols.
Takeaway: Flash loans aren’t evil—but they demand respect. Build with security in mind, and always test against edge-case liquidity scenarios.