Why are Flash Loan attacks on the rise?
Flash loan attacks are on the rise in the DeFi space. Within a very short time frame, sometimes just seconds, you can run off with a serious amount of money.
Let us have a look at what flash loan and a flash loan attacks are. The picture below tells in a nutshell how a flash loan works.
What is a flash loan?
A flash loan allows you to take out a loan without collateral and is executed by a smart contract. The loan was pioneered by Aave —a top lending protocol in DeFi. Flash loans are also referred to as ‘zero-risk loans’ and are becoming popular in the DeFi world.
Many crypto-industry experts are in favor of flash loans as it provides an innovative way to arbitrage and facilitates quick trades that aren’t possible in traditional finance.
So, there are 4 unique traits of flash loans:
- Unsecured loans with no collateral
- No credit checks required
- No limit on how much you can borrow
- Executed via smart contracts on the blockchain.
Within a single transaction, you can borrow as much as you like. However, by the end of this transaction, you need to pay back the full loan. If you cannot repay the loan, the smart contract will roll back the transaction, as if it never happened.
What is a flash loan attack?
It is a type of DeFi attack where cyber thieves can borrow hundreds of thousands of dollars’ worth of ETH from a lending protocol. These attackers then use such huge funds to manipulate the market and exploit several DeFi protocols. At the expense of regular investors and platform users, they run off with significant profits simply by threading the flash loan amounts through a series of vulnerable on-chain protocols.
Flash loan attacks can take place within a few seconds and the irony is it still involves four (04) or more DeFi protocols.
Why are flash loan attacks on the rise?
By its principle, flash loans are high-reward schemes with low risk and cost. These attributes have made it a ‘ripe target’ to cybercriminals. Here are a few top reasons why flash loan attacks are on the rise.
- This form of a digital criminal attack is very cheap to execute. You only need a computer with an internet connection. Moreover, you will need a creative mind. Use your imagination and be inventive, to come up with the right code.
- The risk you run is very low. A DEX (decentralized exchange) is a digital environment. There is no need to physically be there, nor for any identification. Consequently, flash loan attackers run off with high rewards, and rarely, if ever, get caught.
- A flash loan allows you to loan as much crypto as you want. This is the key that allows you to manipulate the market and execute an attack.
- Once you execute a flash loan attack successfully, you generally walk away with an essential amount of crypto. You fulfilled the smart contract and paid the loan back. As a result, you are left with the spoils of the attack.
These factors make it very attractive for criminal minds to try out and execute flash loans.
There is currently no way to eradicate the chances a flash loan attack, but it can be mitigated. Contact RD Auditors to find out how we can help your project.