After the entry of Defi concept in the cryptocurrency market, a new concept flash loan entered.
In this article we will explain flash loan in more simplified words and also we will explain flash loan attack which is a highly challenging part of Defi concept.
Flash loan is a facility of Defi based projects.
At the Defi based exchange, we can take loans without collateral but for a small interval of time.
This concept is totally different from our traditional finance system, where we need to provide collateral to get a loan.
But in the Defi exchange we don’t need to provide any collateral. But this facility of taking flash loans is dependent on the situation.
So we have no freedom to take loans anytime according to our needs.
This condition of flash loan facility remains available when a particular coin has a sufficient difference in the price between two or more Exchanges.
For example if the price of token A is $1 and the same token price is $1.1 at another exchange. Then we can take a loan from the first exchange in the form of an A token and then we can sell this A token at another exchange. At last we need to repay the same amount of fund/token to the initial exchange from where the flash loan was issued.
Flash loan facility is limited for a small interval of time, if we remain unable to repay the loan in the given time then all the transactions will get reverse.
Flash Loan Attack
Flash Loan attack is a loophole of Defi exchange. This facility helps people to earn money by arbitrage trading without any collateral but on the other hand it has lots of insecurities.
Arbitrage Trading: Trading of coins from one exchange to another exchange directly.
In the very starting when the Defi concept was introduced then almost every blockchain experts warned about the Defi concept. Every expert was in favour of this concept of introducing new techniques to make cryptocurrency trading more transparent.
Related: Advantage and Disvantage Of Defi Concept.
Besides support, experts warned. They said”, Defi is in the initial development phase and we can’t trust Defi based projects blindly from the point of security of funds.
While flash loan is a most useful facility of Defi concept but it is not safe for Defi based Exchanges.
Many hackers who know about coding programs in blockchain and Defi based projects can figure out errors and loopholes.
These hackers manipulate the market price of a particular coin at two different exchanges. And then they take flash loans and at the end they transfer their funds to another block which remains untraceable.
Flash Loan Attack On BurgerSwap Exchange
At BurgerSwap exchange on 28 May 3AM ( UTC+8), A hacker stole $7.2 Million dollars by going through a loophole in the Flash loan.
Since many people are blaming Binance Smart Chain. People are saying that BSC is not safe and every new project which is based upon BSC has lots of errors in coding.
But here we can’t blame BSC only, because at one side If BSC has a loophole in coding then at another side flash loan facility is not a good thing.
There should be a system of collateral security, at least by 50-60% and also flash loans should be restricted for those users who have KYC verification through a genuine service.
These types of new rules will help to stop such types of attacks in Defi exchanges.