Flash Loan Attacks on DeFi Protocols: How They Work and How to Stop Them

Flash loan attacks aren’t science fiction. They’re real, happening right now, and they’ve stolen hundreds of millions from DeFi protocols in just a few years. You don’t need a team of hackers or a vault full of crypto to pull one off. All you need is a few thousand dollars in gas fees and a smart contract vulnerability. That’s the scary part.

What Exactly Is a Flash Loan?

A flash loan is a loan with no collateral, no credit check, and no repayment period-except it has to be paid back within the same blockchain transaction. If you don’t repay it by the end of that one block, the whole thing gets undone, like it never happened. It’s not magic. It’s code.

This feature was built into AAVE, one of the first major DeFi lending platforms, to let traders do complex arbitrage and collateral swaps in one atomic move. But the same tool that helps legitimate traders also gives attackers a weapon. Because the loan is repaid instantly, there’s no risk to the lender. But for the attacker? It’s free money-if they can manipulate the system just right.

How a Flash Loan Attack Unfolds

Here’s how it works in practice:

1. The attacker borrows, say, $10 million in ETH from a flash loan provider like AAVE.
2. They immediately swap that ETH for a smaller, less liquid token-like a new DeFi coin trading at $0.10 on a small DEX.
3. Because they’re buying a huge amount all at once, the price of that token spikes to $1.00 on that same DEX.
4. They take that inflated token and deposit it as collateral on another DeFi protocol-say, a lending platform that uses the DEX’s price as its only oracle.
5. Now the protocol thinks they’re worth $100 million in collateral (because the token is now priced at $1.00), so they let them borrow $80 million in stablecoins.
6. They use those stablecoins to buy back the original ETH they borrowed.
7. They repay the flash loan, pocket the difference, and vanish.

The whole thing happens in under 15 seconds. No one sees it coming. No one can stop it. The blockchain doesn’t care who you are. It only cares if the math adds up at the end of the transaction.

Real-World Attacks That Shook DeFi

These aren’t theoretical. They’ve happened-and they’ve cost real people real money.

In April 2022, an attacker used a $1 billion flash loan to take over Beanstalk Farms, a decentralized stablecoin protocol. They manipulated the price of BEAN tokens, then borrowed far more than they should’ve been allowed to, drained the treasury, and walked away with $182 million. The protocol never recovered.

In 2023, PancakeBunny lost $200 million when attackers flooded its liquidity pools with fake tokens, inflated prices, and stole the underlying assets. The BUNNY token dropped 90% in hours.

Even in March 2025, KiloEx was hit for $7 million. The pattern was the same: borrow, manipulate, exploit, repay. The attacker didn’t break into anything. They just used the system’s own rules against it.

Why Are These Attacks So Hard to Prevent?

Three big reasons:

• Speed: Everything happens in one block. No human can react that fast.
• Accessibility: You don’t need to be a hacker with years of experience. A basic understanding of Solidity and a few thousand dollars in gas can be enough.
• Reliance on Oracles: Most DeFi protocols get their price data from external sources-called oracles. If a protocol only uses one DEX for price feeds, it’s asking for trouble. A big trade can easily distort the price.

Think of it like a bank trusting a single ATM to tell it how much money you have. If someone tampers with that one machine, the whole system believes you’re rich-even if you’re broke.

How Protocols Are Fighting Back

Some DeFi projects have started fixing their weaknesses. Here’s what’s working:

• Multiple Oracles: Instead of relying on one DEX, protocols now pull price data from 3-5 different sources. If one gets manipulated, the others can cancel it out.
• Time-Weighted Average Price (TWAP): Instead of using the current price, protocols use the average price over the last 5-10 minutes. That makes it impossible to spike a price in one block and exploit it.
• Transaction Delays: Some protocols now delay large withdrawals or collateral changes by a few minutes. It’s not perfect-it slows things down-but it gives time for alerts to trigger.
• Code Audits and Formal Verification: Leading protocols now hire third-party auditors to test every line of code before launch. Tools like Slither and MythX scan for reentrancy bugs, unchecked external calls, and logic flaws.

Amberdata and Chainlink have pushed for on-chain oracles that publish data directly from trusted sources, not just from DEX trades. That’s a big step forward.

What You Can Do as a User

If you’re providing liquidity or using DeFi protocols, here’s how to protect yourself:

• Avoid small, new protocols with low liquidity and no audits. If they’ve been live for less than 6 months and haven’t been audited by a reputable firm, assume they’re risky.
• Check the oracle setup. Look up the protocol on DeFiLlama or similar sites. If it says “Price Source: Single DEX,” run.
• Use platforms with insurance. Some protocols, like Nexus Mutual or InsurAce, offer coverage against flash loan attacks. It’s not free, but it’s better than losing everything.
• Don’t stake everything. Spread your funds across multiple platforms. If one gets hacked, you won’t lose it all.

The Bigger Picture

Flash loan attacks aren’t going away. As DeFi grows, so do the tools attackers use. In 2025 alone, flash loan attacks contributed to over $1.7 billion in total crypto losses-up from $1.49 billion in 2024. That’s a 14% jump in just one year.

Some experts say the next wave will involve AI-driven attacks that automatically scan for vulnerable contracts and launch exploits in real time. Others warn that regulators might step in and force DeFi protocols to implement KYC or transaction limits-something that goes against the whole point of decentralization.

But the truth is, the problem isn’t the flash loan. It’s the lack of safeguards around price feeds and collateral calculations. Flash loans are just a tool. Like a hammer. You can build a house with it-or break a window.

The future of DeFi doesn’t depend on banning flash loans. It depends on building smarter, more resilient systems that can’t be tricked by a single transaction.