Research Summary: Towards A first step to understand flash loan and its application in Defi Ecosystem


  • The researchers explore what flash loans are, how they work, which platforms provide this service, and their overall impact to the defi ecosystem.
  • They identify four major applications (arbitrage, wash trading, flash liquidation, and collateral swap) by studying over 76,000 transcations.
  • Flash loans open up opportunities for financial activities that were previously unavailable without access to large amounts of capital. They are growing in popularity.

Core Research Question

What is a flash loan and what are its applications?


Dabao Wang, Siwei Wu, Ziling Lin, Lei Wu1, Xingliang Yuan, Yajin Zhou, Haoyu Wang, and Kui Ren


Lending Platform: A platform (usually in the DeFi ecosystem) that allows depositors to lock their capital (“collateral”) to borrow assets.

Collateralization Ratio: The minimal ratio of collateral value to the value of the debt borrowed, which once reached will trigger the lending platform to sell the collateral and clear the loan (“liquidate”).

Flash Loan: A new functionality that enables loan borrowing without collateral, allowing users to take out huge loans they wouldn’t otherwise be able to have without sufficient collateral, so long as they return the funds within a single transaction.

Transaction: In the paper, a transaction unless noted otherwise refers to an external transaction, which is an action invoked by accounts controlled by private keys (“Externally Owned Accounts (EOA)”), and will contribute to a state change on the Ethereum blockchain. EOAs are different than accounts that are governed by smart contracts as they are controlled by user actions.

Arbitrage: Taking advantage of price differences between markets by buying low from one place and selling high in another.

Wash Trading: Trading to create artificial activity with the intention to lead people to perceive a platform or asset as more popular that it actually is. This controversial behavior is widely banned in traditional markets.

Flash Liquidation: A liquidation backed by flash loans. Once a loan reaches its collateral ratio, the collateral becomes available for anyone (“liquidator”) with capital to trade in via a fixed discount or by auction (“liquidation”).

Collateral Swap: To avoid liquidation at severe price changes, the loan taker redeems the collateral from the old loan and opens a new position with a different asset.


Flash loans revolutionize a specific type of loan-taking by locking an entire lend-and-borrow workflow within a single transaction.

First, flash loan providers transfer requested assets to users. Then they invoke users’ pre-designed operations. Users interact with other contracts to execute operations with borrowed assets. Once the execution is completed, users return the borrowed assets with or without the extra fee charged by flash loan providers. Finally, flash loan providers will check their balance. If they discover that no or non-sufficient assets are returned by users, they will revert the transaction immediately.

The figure below (Figure 1) shows the workflow of a Flash Loan transaction.

The authors design three patterns to identify flash loan transactions. Based on the patterns identified, 76,303 transactions were found within the Ethereum ledger. The numbers suggest that flash loan services are becoming increasingly popular over time.

Flash loans can be applied to other purposes such as arbitrage, wash trading, flash liquidation and collateral swap.
Malicious users may capitalize on flash loans function to launch operations with large amounts of assets that they do not have.


The researchers use both qualitative and quantitative methods to explore the nature of flash loans and their applications.

They consult existing literature on flash loans generally and specifically to the Aave, dYdX and Uniswap V2 platforms to study the nature of flash loans and to identify flash loan transactions.
Under the quantitative approach, the researchers collected over 1,000,000,000 transactions from the Ethereum blockchain ledger, identified flash loan transactions by the patterns found qualitatively, and conducted a time series analysis to understand the application’s popularity.


The research identified over 76,303 Flash Loan transactions and 1,454 receivers; their distribution among Flash Load providers is detailed in table 1.

They’ve also quantified how popular flash loans have become over time.

Arbitrage opportunities are enabled by flash loans because they allow users to take on price differences without pre-owning collateral.

Wash trading, used to create trading volume, requries huge amounts of capital, and are enabled by flash loans taken out to contribute to this activity.

Flash liquidation enables people without capital to seek profit by buying undercollateralized assets at discount.
Collateral swaps powered by flash loans would solve users’ need for swapping by providing capital for them to pay back their loan and swap collateral.

Discussion and Key Takeaways

Flash Loans: The research sheds a light on the function of flash loans and their application using real world examples.
Malicious operation: The research identifies potential manipulation that can occur during flash loans transactions and proposes future research on it.
Applications: Flash loans can be applied to arbitrage, wash trading, flash liquidation and collateral swap.

Implications and Follow-ups

The researchers suggest two potential research directions: arbitration and DeFi attacks. Flash loans have enabled arbitration bots, which take on price differences in a timely manner to maximize profits. DeFi attacks are proliferating. Effective countering strategies are an open question. These attacks are sometimes powered by flash loans.


  • Flash loans enable financial activities that were before not possible without large amounts of capital. They are a double-edged sword in this ecosystem and should be studied carefully.
  • The research could be useful to DeFi operators. Anyone transacting with DeFi can use this research to understand the what a flash loan is, the problems associated with them, and how best to overcome them.

@Samuel94 thanks so much for contributing this summary – I’m curious, what are the positive applications for a flash loan? Are there constructive things that one could do having a million dollars for a microsecond?

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Flash Loan functionality will be very useful for small medium enterprise and startups that require loan to establish their business ideas with little or no collateral most especially in the developing countries


Would having a loan for a moment be much use though? I thought a flash loan was a single transaction worth of value. I guess there could be legitimate uses of flash loans like in defending a DAO from a governance attack or punishing a sandwich attacker. Do you have any other suggestions for potential use cases? I’m sure I’m missing something big and obvious.

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Flash loan plays an important role or aids arbitrage traders. So for instance, where two trading platforms offer different prices for same token, the instantaneous nature of flashloan could aid a trader access loan to sell in one platform and purchase in another platform thereby taking advantage of low and high prices in the different platforms.

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@Samuel94 on balance do you think that the crypto community should take steps to counter flash loan based arbitrage? Or do you see them as a vital part of the ecosystem? They definitely seem to help make sure that oracles are accurate.