Decentralized finance (DeFi) loan protocol Aave has seen an explosion in the number of flash loans issued — with the daily value of said loans growing more than 1,000% since the start of July from $11 million to more than $130 million as of July 27.
Aave describes its flash loans as “the first uncollateralized loan option in DeFi,” allowing traders to instantly borrow funds provided that the liquidity is returned to the pool “within one transaction block.”
The loans are intended for use in arbitrage and collateral swapping, allowing users to dictate instructions via smart contract to execute transactions. A 0.9% fee is charged on the gains from the transaction, with the fee being distributed among the platform’s liquidity providers.
Should the borrower fail to meet the loan condition, “the whole transaction is reversed to effectively undo the actions executed until that point” and ensure the safety funds in Aave’s reserve pool.
In analyzing the aftermath of the attack, crypto exchange Coinbase predicted that more “flash loan style oracle attacks” will target the DeFi ecosystem in future — warning that the “combination of flash loans and a web of composable DeFi protocols that interact in complex ways have created [a] new class of vulnerabilities.”