What Is a Flash Loan Attack and Can Crypto Traders Hedge Against It?

Cryptocurrency investments are largely secure, but flash loan attacks can—and do—happen. What is a flash loan attack?

Rachel Curry - Author

May 28 2021, Published 11:52 a.m. ET

While digital tokens might seem like a natural part of the current fiscal ecosystem, cryptocurrency has only been around since Bitcoin's dawn in 2009. Coin trades usually go down without a hitch, but flash loan attacks can—and do—occur.

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Let's go over what a flash loan attack is, some examples in action, and whether or not cryptocurrency investors can hedge against it.

To understand flash loan attacks, you need to know what a flash loan is.

Think about a regular loan. One type of loan is an unsecured loan, which requires no collateral. Crypto blockchains basically execute trades like an unsecured loan, except without the prerequisite of a credit check. You repay the loan during the same transaction. If it isn't paid in a flash (hence the name), the loan is cancelled and the coins return to the lender.

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The blockchain's security exists in the code, but it's fallible.

A flash loan attack is a hack on the crypto lending system.

Flash loan hackers take a lot of steps to get around the coded security system. These steps vary during attacks and the breadcrumbs can be difficult to follow. If successful, these attackers are able to steal millions in cryptocurrency valuation.

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There isn't any interpersonal negotiation required, which makes it even quicker than hacking something as monumental as the Colonial Pipeline. In that instance, Dark Side received $4.4 million multiple days after initiating the attack.

BurgerSwap just suffered a flash loan attack worth $7.2 million.

Hackers hit BurgerSwap, a decentralized finance (DeFi) autonomous program working with the Binance Smart Chain (BSC). They came out with $7.2 million in altcoins. In short, the hackers developed a fake cryptocurrency and used it to alter the value of BurgerSwap's native token, BURGER. They eventually pocketed the return and came out with BURGER, Wrapped Binance Coin (WBNB), and Tether (USDT).

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BurgerSwap took to the Twitter stage to divulge the details of the flash loan attack. It started at about 3:00 a.m. ET on May 28. The coin theft occurred over a series of 14 transactions.

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BURGER has fallen by 23.33 percent over the last 24 hours. Most of the trading volume is in exits.

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Bunny token crashed after experiencing a flash loan attack.

On May 20, another DeFi program called PancakeSwap was used to conduct a $3 million flash loan attack. Ultimately, the hacker bought and dumped Bunny tokens as part of the attack, which ultimately caused its value to fall a gut-wrenching 95 percent.

Can crypto investors hedge against flash loan attacks?

Ultimately, the result of a flash loan attack is out of your hands. By limiting concentrations of singular protocols or altcoins, you can hedge against these attacks to a degree. However, this is the inherent risk involved in cryptocurrency. Balancing your portfolio with more established coins is also a smart move.

As cryptocurrencies shift protocols away from proof-of-work, additional questions will be raised about the security of alternatives.


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