Why do Flash Loans become the most covert predators in DeFi

Do you think DeFi is already “wild” enough? But when attackers steal tens of millions of dollars within a second, you realize what true danger really looks like. And the main culprit behind all this is a seemingly perfect innovation—Flash Loan.

A loan with zero risk that can trigger disaster

It sounds like a fairy tale, but flash loans are exactly such an existence: you can borrow huge amounts of funds without any collateral, with the only condition being—you must repay within the same transaction. If you can’t, the entire transaction is reverted, as if nothing happened.

This design was originally meant to give arbitrageurs, liquidators, and protocol optimizers a stage to showcase their skills. But it is precisely this “elegance” that has become a weapon for hackers.

From theory to reality: How do Flash Loan attacks work?

When a hacker decides to act, the process is actually very simple:

Step 1: Borrow a large amount of funds via a flash loan (e.g., 10 million USDC)
Step 2: Use this money to manipulate the price on a decentralized exchange, artificially lowering the price of a certain token
Step 3: Exploit the manipulated fake price to perform profit-generating operations on other protocols (such as liquidating users at inflated prices or extracting funds that shouldn’t belong to them)
Step 4: Quickly repay the flash loan principal plus fees, pocket the profit

The entire process occurs within a single blockchain transaction—so fast that you can’t react in time.

Lessons from history: The robbed digital assets

bZx incident (2020)
Attackers used flash loans to manipulate token prices, fooling the liquidation mechanism. Loss: $1 million. This was the first time the entire DeFi community realized the gravity of the problem.

Harvest Finance disaster (2020)
Hackers borrowed via flash loans to manipulate stablecoin prices, causing severe distortions in USDC and USDT prices on the protocol. $34 million evaporated within minutes.

PancakeBunny collapse (2021)
A similar attack method was used again, this time against BUNNY and USDT liquidity pools. Losses of $45 million left many retail investors wiped out.

Why were all these defenses broken?

Price oracle too “naive”
Many protocols rely directly on real-time prices from DEXs but fail to realize that these prices can be manipulated instantly. They trust the data sources—making them prey for hackers.

Logical vulnerabilities in smart contracts
Developers sometimes overlook certain boundary conditions when writing contracts. When faced with monsters like flash loans, these vulnerabilities are fully exposed.

Lack of defense delay mechanisms
If protocols could wait a few blocks after price manipulation occurs before executing critical operations, many attacks could be prevented. But most early DeFi projects didn’t think of this.

What should you do? Protocols and users each have their defenses

For development teams:

• Use verified oracles (like Chainlink), instead of relying solely on on-chain data
• Introduce TWAP (Time-Weighted Average Price) mechanisms to make price manipulation more difficult to execute instantly
• Incorporate multi-signature verification in smart contracts to ensure large transactions are manually reviewed
• Conduct regular professional audits—don’t assume you’re too smart

For ordinary users:

• Avoid engaging with DeFi projects that haven’t undergone security audits, no matter how high their APY
• Keep an eye on DeFi security incident news; if a project “blows up,” withdraw immediately
• Choose platforms with a proven track record and large community presence—these projects have enough resources to fix vulnerabilities
• Never put all your assets into a single protocol

Flash Loan: Angel or Demon?

Flash loans themselves are not inherently bad. They create opportunities for legitimate arbitrage, liquidation, and refinancing, making the DeFi ecosystem more efficient. The problem is, once you create such a powerful tool, the defense must be smart enough to counterattackers’ creativity.

Currently, as more projects deploy protective measures, new flash loan attacks are becoming increasingly rare. But that doesn’t mean the threat has disappeared—it is simply evolving. The next generation of DeFi security challenges could be more covert and complex.

So, instead of becoming a victim, it’s better to become knowledgeable. Understand how flash loans work, learn the logic behind attacks, and choose safer platforms—this is the way to survive in the DeFi jungle.