What Is A Flash Loan Attack, And What Can I Do To Avoid It?
Since the development of decentralized finance (DeFi), the way people view and use cryptocurrencies has changed massively, especially with independent financial platforms offering various types of crypto lending, which provides significant value to both borrowers and lenders.
Decentralized Finance (DeFi) takes the decentralized concept of blockchain and applies it to the field of finance, which has seen a rise in popularity. The flash loan is a great way for borrowers to take advantage of arbitrage possibilities fast. It allows you to borrow money to buy a crypto asset, sell it, pay back the loan, and profit.
What Is a Flash Loan Attack, and How Does It Happen?
A flash loan attack is when an attacker takes advantage of a system’s smart contract security by borrowing large amounts of money without having to put up any collateral. They then manipulate the price of a cryptocurrency asset on one exchange before selling it on another. The attacker completes the process quickly, and he or she repeats it several times before disappearing.
What Is a Flash Loan and How Does It Work?
Crypto lending has grown in popularity as the DeFi lending market has developed. Flash loans have become particularly tempting as a kind of lending since they make full use of currently available technologies.
With a flash loan, a user may borrow as much as they want without any initial costs. If you want to borrow $70,000 in ETH, for example, a lending protocol will provide it to you right now, but that doesn’t imply it’s yours. You must do something with the borrowed funds in order to repay the debt and maybe pocket any remaining funds.
To make this work, the process must be quick, and the debt must be paid to the protocol in a timely manner, or the transaction will be reversed. Because the agreement to pay your debt is enforced by a blockchain, a decentralized lender does not require collateral from you. Attackers of flash loans thrive on devising new ways to manipulate the market while still adhering to the blockchain’s rules.
Why Are DeFi Loan Attacks So Common?
In the minds of criminals, flash loans are a risky combination of low-risk, low-cost, and high-reward schemes.
The following are the main reasons why flash loan attacks are on the rise:
Attacks on flash loans are low-risk.
Any criminal activity carries risk, but imagine robbing a bank without having to enter the building. This is a crude summary of the attackers’ point of view. The last year and a half have demonstrated how easy it is to steal from DeFi protocols and get away with it.
In fact, no one has ever been caught stealing money from a flash loan, at least not recently. Because of the nature of permissionless networks and the available tools for obfuscating identities, the vast majority of them don’t leave a trace once they’ve left.
Flash Loan Attacks Are Inexpensive
Apart from 51 per cent attacks, which require massive resources to pull off, flash loans only require three things: a computer, an internet connection, and, most importantly, ingenuity. Hackers appear to need to plan their attacks, but the execution-only takes a few seconds to a few minutes. As a result, it does not need a significant commitment of time.
How to Protect Yourself from Flash Loan Attacks
Due to the current increase in the number of flash loan attacks, it is clear that there is no one-size-fits-all solution. However, there are significant efforts that may be made to address this issue.
Detecting Flash Loan Attacks Using Tools
The delay in response times from DeFi platform developers is one of the most important factors that allows exploiters to get away with flash loan attacks. And we can’t blame them: exploits are notoriously difficult to detect until it’s too late.
OpenZeppelin has released OpenZeppelin Defender, a technology that allows project managers to identify smart contract vulnerabilities and other strange behaviour, allowing them to respond quickly and neutralize threats. This technology has already been implemented by the Synthetix, Yearn, and Opyn teams.
For price data, use decentralized Oracles
Instead of depending on a single DEX for its price feed, DeFi platforms could use decentralized pricing oracles like Chainklink and Band Protocol to decrease the attack vector for flash loan attacks.
Make critical transactions go through two blocks.
Dragonfly Research has recommended requiring flash loans to pass through two blocks rather than one. However, this is not a full solution because, if designed incorrectly, the exploiter may just flash loan attack both blocks. Furthermore, because transactions will no longer be synchronous, this might have a significant impact on the user interface of DeFi protocols.
Conclusion
Another great addition to the DeFi ecosystem is flash loans. They are currently vulnerable to attack, but this will change in the future.
We’ll see a decrease in the number of hacker attacks as developers write better smart contracts and more systems deploy security tools and decentralized oracles for pricing.
If you’re wondering whether or not flash loans are a great investment, we think so. Remember that a flash loan attack is always a possibility, therefore be cautious while lending your cryptocurrency on DeFi sites.
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