The Flash Loan Attacks Explained

Today we're breaking down the flash loan attacks that rocked the DeFi community in a way even your grandpa can understand, presented in both audio and full-text format below.

On today's show we'll break down The flash loan attacks that rocked the DeFi community and, depending on whom you ask, either demonstrated fundamental flaws in the world of "DeFi, or simply show how early we are in this technology.John: Okay, if you're new to the sector or haven't been paying that much attention to ethereum you're probably wondering,"What is DeFi, and what are flash loans?" This story is really about flash loans, but before we get there, let's talk about Decentralized Finance, better known as DeFi.Adam: So John, think back to when you were a poor college student, to that time you pawned your electric guitar.

You give them a thing more valuable than the loan you want to take to hold as collateral in case you don't pay back the loan.

Adam: Yeah?John: Well, with a lot of careful planning it's actually possible with cryptocurrency and DeFi to use one of these flash loans to take advantage of trading opportunities, the imbalances between different marketplaces, to make money and pay back the loan, almost instantly.

With flash loans, the whole idea is that you only get the loan if you can prove that you'll pay it back at basically the same time.

John: Step one: I get a flash loan in a cryptocurrency called ether and use some of it to buy a lot of dollar-pegged stablecoin that should be worth one dollar each.

John: Step three: I take the stablecoins that should be worth a dollar, but which look like they're worth two dollars now because I've been pushing up Bob's price, to take another flash loan where the lender thinks he's being paid back in full, but is actually accepting just half of what I owe him since he thinks the money I'm paying him with, the not-so-stable-coin, is only temporarily worth $2.Adam: So by pushing up the price of the stablecoin temporarily to double its value and then paying back the loan with it, you only need to pay back half of what you owe.

John: Yeah, and it's important to mention that while this attack basically stole money from a flash loan provider, there was nothing about the flash loan that really failed.

The Kyber Network, or Bob as we've been calling him, isn't really related to the flash loan project at all, but he was who the flash loan people thought would be the most reliable way for them to keep track of different token prices.

Adam: What I'm hearing is now is an excellent time to take out a flash loan and stuff some money in Bob's pocket, for great profit?