Flash Loan Farming

The entire strategy—borrow, execute, repay—must succeed within one block. If any step fails, the entire transaction reverts, eliminating default risk for the lender. This atomicity is enforced by the blockchain's execution environment, making it a trustless operation.

• Key Benefit: No capital at risk for the borrower beyond gas fees.
• Technical Foundation: Relies on smart contracts that bundle the logic into a single call.

Strategists can control vast sums of capital with zero upfront collateral, enabling extreme leverage for arbitrage. For example, a user could borrow $10M to exploit a 0.5% price discrepancy between two DEXs, profiting from the spread after repaying the loan.

• Core Mechanism: The borrowed capital acts as the working capital for the trade.
• Scale: Allows retail users to execute trades typically reserved for large institutions.

The most common use case, exploiting price differences for the same asset across different liquidity pools or exchanges. A typical flow:

1. Borrow asset X via a flash loan.
2. Sell X on DEX A where price is high.
3. Buy X on DEX B where price is low.
4. Repay the loan + fee, keeping the profit.

This helps enforce price equilibrium across DeFi markets.

Users can swap the collateral backing a loan in protocols like Aave or Compound without closing their position. In one atomic transaction, a flash loan is used to:

• Repay the existing debt.
• Withdraw the old collateral.
• Sell it for a new asset.
• Deposit the new asset as collateral.
• Take out a new debt to repay the flash loan. This allows for efficient portfolio rebalancing and risk management.

Flash loans can bootstrap liquidity for liquidity mining campaigns. A user can:

• Borrow a large amount of two tokens (e.g., ETH and USDC).
• Provide them as liquidity to a pool to receive LP tokens.
• Deposit those LP tokens into a yield farm to earn rewards.
• Exit the position, repay the flash loan, and keep the farming rewards. This requires the rewards to outweigh the flash loan fee and gas costs.

Flash loan farming is entirely dependent on the correctness and security of the involved smart contracts. Key risks include:

• Smart Contract Bugs: Vulnerabilities in any protocol in the transaction path can lead to loss of funds.
• Slippage & MEV: Large trades can be front-run by bots, reducing or eliminating profits.
• Gas Price Volatility: High network congestion can make profitable strategies unviable.
• Oracle Manipulation: Some advanced strategies rely on oracle prices, which can be attacked.

Exploits price discrepancies for the same asset across different decentralized exchanges (DEXs) or liquidity pools. A flash loan provides the capital to buy low on one platform and sell high on another, repaying the loan and keeping the profit.

• Example: Borrowing DAI to buy ETH on Uniswap where it's cheaper, then selling it on SushiSwap where it's more expensive.
• Key Requirement: The arbitrage profit must exceed the flash loan fee and gas costs.

Used to refinance a lending position without personal capital. A flash loan is used to repay an existing loan on a protocol like Aave or Compound, freeing the original collateral. This collateral is then used for a new, more profitable action before the flash loan is repaid.

• Process: 1) Flash loan provides repayment funds. 2) Original collateral is unlocked. 3) Collateral is deployed (e.g., to a higher-yield pool). 4) A portion of the yield repays the flash loan.
• Benefit: Enables users to avoid liquidation risks or capture better yields.

Executing an underwater loan liquidation for profit. When a loan becomes undercollateralized, anyone can liquidate it for a bonus. A flash loan provides the capital to repay the bad debt, claim the collateral and liquidation bonus, sell the collateral, and repay the loan.

• Mechanism: The strategy capitalizes on the fixed liquidation incentive offered by protocols.
• Competition: This is often a highly competitive, automated process performed by bots ("liquidators") seeking the most profitable opportunities.

Amplifying returns from yield farming or liquidity mining by using borrowed capital. A flash loan provides a large sum to deposit into a liquidity pool or vault, claim the associated governance token rewards, sell them, and repay the loan—all in one transaction.

• Amplification: Allows farmers to act with capital magnitudes larger than their own.
• Risk: Highly sensitive to impermanent loss and token price volatility during the transaction. The farming rewards must exceed costs.

A historically common attack vector, now largely mitigated. It involved using a flash loan's massive capital to manipulate an asset's price on a DEX that served as a price oracle for another protocol. The distorted price could then be used to borrow excessive funds or trigger faulty liquidations.

• Modern Context: This is considered an exploit, not a legitimate strategy. Protocols now use time-weighted average price (TWAP) oracles and other safeguards.
• Legacy: Famous incidents like the bZx attacks demonstrated this vulnerability.

A flash loan is a type of uncollateralized loan that must be borrowed and repaid within the same transaction block. Farming strategies leverage this to:

• Borrow a large sum of capital with zero upfront collateral.
• Execute a complex, multi-step arbitrage or liquidation strategy.
• Repay the loan plus fees, keeping any profit.
• If the repayment fails, the entire transaction is reverted, eliminating risk for the lender.

Farming strategies typically target inefficiencies or incentive programs:

• Arbitrage: Exploiting price differences for the same asset across DEXs (e.g., buying on Uniswap, selling on SushiSwap).
• Collateral Swaps: Using the loan to repay a debt position and re-collateralize with a better asset in one move.
• Governance Farming: Borrowing tokens to meet voting or staking thresholds for a protocol's reward distribution, then returning them.

While profitable, this activity carries significant risks:

• Smart Contract Risk: The entire strategy is code; a bug in any involved contract can lead to total loss.
• Mempool Sniping: Public transactions can be front-run by bots with higher gas fees.
• Slippage & Fees: Price impact and network fees can erase thin profit margins.
• Protocol Design Risk: Incentive programs can be changed or exploited by the protocol itself.

Flash loan farming has a dual impact on DeFi markets:

• Positive: Increases market efficiency by rapidly correcting price discrepancies and liquidating undercollateralized positions.
• Negative: Has been the vector for several high-profile exploits, where attackers used flash loans to manipulate oracle prices or governance mechanisms to drain funds from other protocols.

Attackers use flash loans to borrow massive amounts of an asset to temporarily distort its price on a decentralized exchange (DEX), exploiting protocols that rely on that DEX as a price oracle. This can trigger faulty liquidations or allow the minting of synthetic assets at incorrect valuations.

• Example: Borrowing a large amount of ETH to skew the ETH/DAI pair price on a specific AMM, causing a lending protocol to misprice collateral and enabling an attacker to borrow more than they should.

An attacker borrows governance tokens via flash loan to gain temporary voting power, proposes and passes a malicious proposal (e.g., draining the treasury), and repays the loan—all within one block. This bypasses the traditional economic cost of acquiring governance power.

• Key Vulnerability: Protocols with low voter participation and governance execution delays are most at risk. The attack is cost-effective as it requires only the transaction gas fees.

Flash loans enable sophisticated multi-step arbitrage that can drain liquidity pools by exploiting flaws in Automated Market Maker (AMM) pricing math or fee mechanisms. Attackers manipulate pool reserves across multiple trades to extract value.

• Mechanism: An attacker might use a flash loan to perform a series of swaps that artificially inflate the price of a low-liquidity token, then use it as overvalued collateral to borrow other assets from a lending protocol before the price corrects.

The complex, multi-contract execution path of a flash loan farming strategy can expose reentrancy vulnerabilities or state inconsistencies in poorly audited yield farming or vault contracts. The borrowed capital amplifies the impact.

• Risk: A contract may incorrectly update its internal accounting (e.g., reward balances) in the middle of a flash-loan-powered transaction, allowing an attacker to claim rewards multiple times or withdraw more assets than deposited.

Flash loan farming contributes to Miner/Maximal Extractable Value (MEV) by enabling large, profitable arbitrage bundles. This can lead to network congestion, increased gas fees for regular users, and a centralization of block-building power among sophisticated searchers and validators who can front-run these transactions.

Protocols can implement several defenses:

• Time-Weighted Average Price (TWAP) Oracles: Use price feeds averaged over multiple blocks to resist flash loan price manipulation.
• Governance Delay (Timelocks): Enforce a mandatory waiting period between a vote's passage and execution, nullifying flash loan-based takeovers.
• Circuit Breakers & Limits: Implement transaction size limits or temporary halts on specific functions during extreme volatility.
• Comprehensive Audits: Rigorous testing, especially for contracts that interact with flash-loanable assets.

The most common objective of flash loan farming. Arbitrage involves profiting from price discrepancies of the same asset across different decentralized exchanges (DEXs) or liquidity pools. A flash loan provides the massive, temporary capital required to execute these trades. A typical flow is:

• Borrow a large sum of asset X via flash loan.
• Swap X for Y on DEX A at a favorable rate.
• Swap Y back to X on DEX B at a better rate.
• Repay the flash loan, keeping the profit in X.

The 'farming' component of the strategy. Yield farming involves supplying or staking crypto assets in a DeFi protocol to earn rewards, typically in the form of governance tokens or fees. Flash loans can be used to artificially inflate a farmer's position size to:

• Qualify for larger reward distributions or higher tiers.
• Perform governance token manipulation by borrowing large amounts to vote in a snapshot.
• This creates a leveraged farming position without personal capital at risk for the transaction's duration.

Flash loan farming is a significant source of MEV. MEV refers to the profit that can be extracted by reordering, including, or censoring transactions within blocks. Searchers use flash loans to fund complex, capital-intensive MEV strategies such as:

• DEX Arbitrage: As described in the arbitrage card.
• Liquidation: Using borrowed funds to liquidate undercollateralized positions for a bonus.
• These profitable bundles of transactions are often bid on by bots in a competitive MEV auction.

The primary technical risk in flash loan farming. The strategy's entire logic—borrow, execute, repay—must be coded into a single, error-free smart contract. Vulnerabilities can lead to total loss of the farmer's gas fees and any profits. Critical risks include:

• Logic Errors: Flaws in the profit calculation or swap routing.
• Oracle Manipulation: Some strategies rely on price oracles, which can be targeted.
• Slippage & Failed Transactions: Market movements can cause swaps to fail, reverting the entire transaction.

A controversial application of flash loan farming. Attackers use flash loans to temporarily borrow massive amounts of a governance token to:

• Pass malicious proposals that would not succeed with normal token distribution.
• Manipulate protocol parameters (e.g., fee structures, collateral factors) for personal gain.
• This exploits the snapshot-based voting common in many DAOs, where token balances are checked at a specific block, not at proposal execution. Protocols mitigate this with vote delegation or time-lock mechanisms.