Decentralised finance (DeFi) protocols have become the preferred playground for hackers. On April 17, 2022, hackers exploited DeFi platform Aave to make massive gains on the stablecoin protocol known as Beanstalk Farms. The hack has been categorised as a flash loan attack and has resulted in $182 million in total losses.
The hacker not only escaped with $80 million worth of crypto gains but also diverted $250,000 as donations to Ukraine. As a result, the BEAN token plummeted by 75 percent from its initial peg of $1.What are flash loans?Liquidity protocol Aave allows users to borrow and settle loans instantaneously in a single transaction without providing any collateral. These are called flash loans.
Smart contracts enforce the terms of these loans, and the entire process of borrowing and repaying the loan happens almost instantly.As you can imagine, flash loans are no ordinary loans.When your bank sanctions a loan, it asks you to attach some assets as collateral in the event of a repayment failure. For example, if you purchase a car through a bank loan, the car acts as collateral and is transferrable to the bank if you don’t return the money.Also Read: What are Stablecoins, how they work, how to buy them, and other questions answeredHowever, in the case of a flash loan, the provision of collateral is completely bypassed. This is because it is designed to eliminate all chances for the borrower to default on the loan.
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