What Is A Flash Loan Attack, And How To Prevent It?

by ImmuneBytes
flash loan: what it is?

Decentralized finance (DeFi) protocols have become the preferred playground for hackers. Since the advent of decentralized finance (DeFi), how people perceive and use cryptocurrencies has significantly changed. This characterizes the emergence of independent financial platforms that offer various forms of crypto lending. With these, lenders and borrowers have benefitted immensely. 

The flash loan is one of these loan types that has become more popular in the DeFi ecosystem since it enables borrowers to take advantage of arbitrage possibilities fast. It offers the loaned money necessary to buy a cryptocurrency asset, sell it, recoup the loan, and profit. Flash loans have also begun to gain traction in the cryptocurrency community, and there is a high chance that they will be even more popular soon. 

As the DeFi industry continues to pace ahead, so do the enormity and number of attacks on these protocols. The flash loan attack is one of the most popular examples of such an attack. While it offers ample benefits, such as instant liquidity and the flexibility to trade with leverage, on the flip side, it also opens the door ajar for several harmful risks. 

In this blog, we will dwell more on flash loan attacks to understand what they are, why they happen, the consequences, examples of flash loan attacks, and how to prevent them. 

ImmuneBytes is the perfect destination to get the answers to all your queries related to flash loan attacks. So, let us begin. 

What Are Flash Loans? 

Before jumping on to the flash loan attacks, it is important to know what flash loans are. 

One of the most interesting features of flash loans is that users don’t need to go through the traditional lending process to gain access to liquidity. It is a type of cryptocurrency loan that allows users to borrow funds without the need to keep collateral in exchange.

They are great short-term trading strategies users often pay back within the same day. Decentralized lending protocols that leverage smart contracts to streamline loan transactions make them possible. These protocols serve as a middleman between the lender and the borrower, using collateralized tokens to guarantee the loan. 

There are several risks associated with flash loans which are as follows: 

  • Since collaterals are not there to back flash loans, they are way riskier than traditional loans. 
  • Users often use these loans for margin trading and several other speculative activities. If the market moves against them, they will have to pay more than they borrowed.
  • Additionally, there is a danger of instability with flash loans. Before the loan is repaid, the value of the collateralized tokens might fall drastically, placing the borrower at risk of losing their collateral.

Today, a vast pool of hackers with prying eyes wish to exploit these flash loans to make a fortune. Now that we’ve given you a brief knowledge about these flash loans let’s get straight to the flash loan attacks and learn more about them. 

What are Flash Loan Attacks? 

“Quick as a flash, the attacker took a loan and made off with the loot before anyone could blink.”

When a hacker obtains a big sum of digital currency through a flash loan and delivers it to an exchange where they may resell it for a profit, the act is known as a flash loan attack. Flash loans make it feasible for customers to borrow money without having to set up any security, which makes them particularly appealing to hackers.

Since the value of cryptocurrencies has skyrocketed, flash loan attacks have become very common in recent years. Every digital currency exchange is always under the Damocles of a sword, with flash loan attacks taking a toll. 

Because complex transactions are involved, detecting these attacks often becomes a hefty task. This is why it becomes incessantly difficult to prevent them. However, if organizations carefully monitor their contracts and decentralized apps to find vulnerabilities and take regular smart contract audit services, they can escape the repercussions of these flash loan attacks. 

Have you ever wondered what could be the reasons for these Cybersecurity attacks?

Let us find out. 

Why do Flash Loan Attacks Happen? 

Time and again, the crypto world has been flooded with the news of flash loan attacks. On Christmas day in 2020, one of the DeFi lending protocols named Aave (AAVE) was attacked. However, these attacks occurred within cryptocurrency before. 

So, why do these attacks keep recurring? 

Let us list a few of them here. 

  1. Easy to execute

The main reason we witness these attacks so frequently is that it is very easy to execute them. All you need is access to a liquidity pool and colossal collateral. When you have these things with you, you can borrow a large amount of money from lending pools and utilize them to purchase assets. 

  1. Profitable

These attacks are very profitable. That’s probably why these occur so frequently. For example, the attacker who attacked the Aave protocol made a profit of more than $7M. Isn’t it so huge? Even the other hackers have likely been able to make similar amounts of money from these attacks. 

  1. Negative impact on the cryptocurrency space

They can result in losses for innocent users caught up in the attack and make people lose trust in decentralized exchanges and protocols. Thus, many hackers who wish to degrade the image of the crypto world get involved in these malicious flash loan attacks. 

Next, we come to the consequences of these attacks. 

What Are The Consequences Of Flash Loan Attacks? 

There are so many serious consequences of flash loan attacks for both the victims and the attacker. The victims can lose their funds and reputation, and there can even be legal actions against them. For the attacker, there can be several legal penalties and reputational damage. 

Attacks involving flash loans have existed for a while. However, flash loan assaults have increased frequently with the growth of decentralized finance (DeFi). This is so that DeFi protocols can often automate transactions. If smart contracts are not properly developed or deployed, they are susceptible to attack. Thus, relying upon a credible smart contract auditing company is a must! 

Attacks against flash loans pose a significant risk to the DeFi market. They emphasize that before smart contracts are used on the mainnet, they must undergo thorough security testing. They emphasize the need for effective risk management while utilizing DeFi protocols.

Let us know to proceed to discuss some examples of these attacks. 

The Biggest Examples of Flash Loan Attacks

Flash loan attacks have increased in frequency in the cryptocurrency industry. Let’s examine some of the most powerful flash loan attacks to date.

  1. DAO attack

A decentralized autonomous organization called The DAO was created on the Ethereum (ETH) network. The Ethereum network was designed to be a decentralized method of financing initiatives. However, in June 2016, a hacker stole almost $50 million worth of ether from the DAO by taking advantage of a bug in its coding.

  1. The MakerDAO attack

A decentralized lending network based on the Ethereum blockchain is called MakerDAO. A hacker borrowed 500 ETH in a flash loan in November 2019 and used it to influence the price of the DAI stablecoin. The attacker afterward made nearly $4 million profit when they sold their DAI.

  1. The bZx protocol attack

A decentralized lending network based on the Ethereum blockchain is the bZx protocol. A hacker borrowed 50,000 ETH in a flash loan in February 2019 and used it to influence the price of the Ethereum-based coin WETH. The attacker afterward sold their WETC for nearly $800,000 in profit.

  1. The dForce attack

A decentralized lending network based on the Ethereum blockchain is called dForce. A hacker borrowed 10,000 ETH in a flash loan in April 2020 and used it to influence the price of the USDC stablecoin. The attacker afterward made nearly $6 million profit when they sold their USDC.

These are but a handful of instances of flash loan assaults that have happened in the bitcoin space. As you can see, these attacks may be very profitable for the perpetrators. And unfortunately, they appear more frequently. Therefore, the need of the hour is to find effective preventative measures to stop the impacts of such flash loan attacks. 

Let us share with you some of them here. 

How To Prevent Flash Loan Attacks? 

With the growth of the DeFi ecosystem, the risks related to flash loan attacks have increased. These are some of the ways to prevent them. 

  1. Always rely on a decentralized exchange. It does not hold your asset. Hence, there’s no chance of attack. 
  2. Stay informed about the latest developments in the DeFi space. 
  3. Using a non-custodial wallet is a great way to prevent flash loan attacks as your keys are safe in them as you have full control over them. 
  4. Use a decentralized lending platform, as hackers are less likely to attack them. 
  5. Don’t stick to putting all your eggs in one basket; when you diversify your portfolio, you tend to rely on others less. 

Conclusion

Security is crucial when it comes to cryptocurrencies. Digital assets worth millions of dollars can be lost due to a single breach. Therefore, it’s critical to know the different types of attacks in the cryptosphere. The flash loan attack is one such assault. It’s crucial to comprehend how flash loan attacks function and what steps may be made to counteract them if you want to stop one from happening. 

For more information about them, you can always contact our cybersecurity professionals at ImmuneBytes. We provide top-notch smart contract security audits to make the financial world a safer place to be.

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