How do "Lightning Loan Attacks" Occur? The Truth Behind the Three Main Mechanisms That Enable Hackers to Steal

In the rapid development of DeFi, flash loan attacks have become an increasingly serious security threat. From the first attack in 2020 to today, hackers have stolen hundreds of millions of dollars worth of assets through this method. To understand why flash loan attacks are so frequent and difficult to prevent, it is essential to first gain an in-depth understanding of how flash loans operate and how attackers exploit vulnerable links within the DeFi ecosystem to carry out coordinated, cross-protocol assaults.

From Unsecured Loans to DeFi Threats—The Dual Nature of Flash Loans

Flash loans are an innovative financial instrument first introduced by Aave in early 2020. Unlike traditional loans that require collateral and complex credit checks, flash loans have three core features, which also provide opportunities for attackers.

First, they are completely unsecured loans. Borrowers can obtain millions of dollars in a flash without providing any collateral or undergoing credit checks. Second, all transactions are automatically executed via smart contracts on the blockchain. The loan agreement stipulates that if the borrower cannot repay the funds within a single block transaction, the entire loan will be fully reversed, as if it never happened. This mechanism eliminates lender risk—regardless of whether the borrower successfully repays, the system automatically ensures the safety of funds. Third, the entire process is extremely fast. From loan approval to repayment, it typically takes only a few seconds, and everything must be completed within the same block.

Because of these design features, flash loans have rapidly gained popularity in DeFi. They create new arbitrage opportunities for users, making complex transactions possible and offering many innovative functions that traditional finance cannot provide. For example, users holding volatile assets can use flash loans to temporarily swap collateral, avoiding liquidation risks; or borrowers can switch lending currencies via flash loans to hedge against rising interest rates.

However, when unlimited, unsecured, no-credit-check, risk-free borrowing appears, malicious participants see opportunities. They begin to exploit the reliance of DeFi protocols on on-chain price information, orchestrating a series of coordinated manipulations to complete the entire cycle—from borrowing to profit to repayment—within a single block. This is the essence of flash loan attacks.

Peering into Attack Details—Analysis of Two Key Flash Loan Attacks

To truly understand how flash loan attacks succeed, we need to examine specific cases.

The 2020 Fulcrum and Uniswap Manipulation Incident

The first widely known flash loan attack occurred in 2020. The attacker borrowed a large amount of ETH via a flash loan from the DeFi lending protocol dYdX, then split it into multiple parts and sent them to different lending and trading platforms. This step was crucial—the attacker aimed to create a chain reaction across multiple DeFi protocols.

On the lending platform Fulcrum, the attacker first established a short position against ETH in terms of WBTC. Simultaneously, they borrowed additional WBTC from Compound on another DeFi protocol. Then, the attacker placed a large buy order for WBTC on Uniswap, a decentralized exchange with relatively low liquidity.

Due to limited WBTC liquidity on Uniswap, this large order immediately pushed up the price of WBTC. Fulcrum was forced to buy WBTC at a price far above the normal market rate to execute the order. Meanwhile, the attacker’s short position suffered huge losses as WBTC’s price rose, but their WBTC holdings on Compound increased significantly in value.

Within a single block, the attacker completed the entire cycle: repaid the ETH loan on dYdX, and profited hundreds of thousands of dollars from the arbitrage. Fulcrum and Uniswap users suffered losses—Fulcrum paid a distorted high price for WBTC, resulting in direct losses of millions of dollars.

bZX Protocol and Stablecoin Price Manipulation

Another flash loan attack involved the bZX-based Fulcrum protocol. This attack exposed blind spots in smart contract price data.

The attacker again borrowed a large amount of ETH via a flash loan, then placed a huge buy order for sUSD stablecoin on the decentralized exchange Kyber. sUSD is pegged to the dollar and should stay around $1. However, smart contracts can only recognize transaction data and price feeds—they cannot understand the economic logic that a stablecoin should maintain a specific price.

The large order drove the price of sUSD sharply up to $2. The oracle system detected this “new” price, and based on this inflated figure, the attacker could borrow more ETH loans than before. After borrowing on the basis of this false high price, the attacker repaid the initial loan and pocketed the interest spread.

These two attacks reveal a common pattern: attackers exploit DeFi protocols’ reliance on on-chain price data, manipulating asset prices by executing large trades on low-liquidity exchanges, then using this false information to deceive lending protocols and other platforms, completing profit and repayment within a single block.

Practical Defense Strategies—How to Counter Flash Loan Attacks

As flash loan attacks become more frequent, DeFi protocols and security experts have developed multi-layered defense strategies.

Decentralized Oracles—Multi-Source Price Verification

The most straightforward defense is to use decentralized oracles to obtain asset prices. Unlike relying on a single on-chain price source, decentralized oracles aggregate price data from multiple independent sources to determine the “true” price. This process ensures that even if one exchange’s price is manipulated, the normal prices from other sources can counteract the false information.

More importantly, many decentralized oracles add extra verification layers. Data submitters need to record information on the blockchain, meaning that attempts to launch attacks with false prices can be reversed during block confirmation delays. This effectively extends the attack window from “within a single block” to “across multiple confirmations,” greatly increasing attack difficulty.

Time-Weighted Average Price (TWAP)—Cross-Block Averaging

Another effective defense mechanism is using Time-Weighted Average Price (TWAP). Instead of taking the current single price, TWAP calculates the average price over multiple blocks or takes the median during that period.

The cleverness of TWAP lies in the fact that flash loans are atomic operations that must be completed within the same block. To manipulate TWAP, an attacker would need to control prices over multiple previous blocks, which is practically impossible on decentralized blockchains. Using TWAP significantly reduces the success rate of flash loan attacks.

High-Frequency Price Updates and Multi-Block Strategies

Some protocols adopt more proactive defenses: increasing the frequency of liquidity pool updates to oracles. More frequent updates allow prices to be captured promptly, and false high-price spikes can be detected in the next update cycle.

Additionally, some protocols implement “double block confirmation” strategies, requiring transactions to be executed across two separate blocks rather than within a single block. This extends the attacker’s operational window and provides more time for the system to detect abnormal behavior. Of course, this approach adds complexity and may negatively impact user experience.

Real-Time Threat Detection Systems

Furthermore, certain DeFi protocols and security firms have developed flash loan attack detection tools that can identify abnormal price manipulation behaviors during transactions and respond swiftly. However, due to the diversity and evolving techniques of flash loan attacks, the effectiveness of these tools still needs validation through more real-world cases.

Future Outlook for DeFi—Flash Loan Attacks Will No Longer Be a Threat

The DeFi space is still in the early stages of rapid innovation. With each flash loan attack, the entire ecosystem advances, and new defense mechanisms emerge. Attackers will continue to find vulnerabilities, but defensive technology is also constantly improving.

Decentralized oracles, TWAP strategies, high-frequency updates, and multi-block confirmation methods have proven effective, and more DeFi protocols are adopting these standards. As industry security standards improve, the systemic risk posed by flash loan attacks will be greatly reduced.

More importantly, the DeFi community needs to establish a shared security awareness. Developers must prioritize security when designing new protocols, auditing firms need to scrutinize price mechanisms for vulnerabilities, and users should be more cautious in choosing well-vetted DeFi platforms. When all participants view defending against flash loan attacks as a necessary responsibility, the threat can be fundamentally mitigated.

In the ongoing evolution, flash loans themselves are not the problem. The issue lies in how to provide convenience, innovation, and arbitrage opportunities while establishing robust defense mechanisms. When this balance is ultimately achieved, DeFi will become a safer, more mature financial ecosystem.