Flash Loans: How Attackers Steal Millions in One Transaction

Instant lending on DeFi represents a major technological innovation, but also a critical flaw in protocol security. In a matter of seconds, millions of dollars can disappear. These attacks exploit a unique feature of Flash Loans: the absence of collateral and instant execution within the same transaction.

Instant loans and their hidden risks

A Flash Loan allows you to borrow a huge sum without a security deposit, as long as the loan is repaid before the end of the same blockchain transaction. If the refund is not made, the operation is cancelled as if it had never taken place. This mechanism is legitimate for arbitrage, refinancing or liquidations.

However, the attackers hijacked this tool. They take a massive instant loan to temporarily manipulate the prices of a token in a decentralized exchange (DEX). This manipulation creates a distortion of price data that oracles — external sources of information — relay to other protocols. Attackers exploit this misinformation to extract assets without authorization on a second platform, repay the Flash Loan, and keep the difference in profit.

Documented Attack Cases: Security Lessons

Several major attacks illustrate this threat. In 2020, bZx suffered an attack that cost around $1 million. The attacker manipulated prices via a Flash Loan to fool the protocol’s liquidation system. In the same year, Harvest Finance experienced a much more serious exploitation: $34 million disappeared in minutes following a coordinated manipulation of the prices of BUNNY and USDT.

The year 2021 marked a turning point with PancakeBunny, which lost $45 million in a similar attack. These incidents show that even established protocols remain vulnerable to this category of threats.

Protection and prevention strategies

The protocols must strengthen their defenses on several fronts. First, using reliable price oracles like Chainlink reduces the risk of manipulation. Secondly, implementing delay mechanisms – in particular the TWAP (Time-Weighted Average Price) – makes it possible to smooth out fictitious price variations over a given period, making manipulation very costly.

Third, smart contracts must systematically verify input data and use multiple signatures for sensitive operations. Finally, regular contract audits by security experts are an essential preventive measure.

Best practices for DeFi users

Retail investors should be extra vigilant. Avoiding leaving large sums of money on protocols that have not undergone an external audit increases security. Monitoring the news of operations and quickly deactivating or withdrawing funds in the event of a protocol being compromised limits potential losses.

Choosing proven platforms with a strong security track record significantly reduces risk. Understanding how Flash Loans work and the vulnerabilities they create allows everyone to make informed choices in the decentralized ecosystem.

Instant lending embodies the innovative potential of DeFi. But like any powerful tool, they require clear understanding and strong protections to prevent abuse. The combination of best practices in terms of protocols and vigilance on the part of users remains the best defense against these attacks.