The Strength of Cardano’s DeFi: Resisting Flash Loan Attacks

Many hacks on the Ethereum platform have used flash loans. An attacker can borrow a huge amount of funds without collateral, use it to make a profit, and then repay the loan in the same transaction. In this article, we will explain why we don’t see this kind of attack in Cardano’s DeFi. You will understand one of the advantages of the UTxO model.

The Principle Of Flash Loans

A flash loan is a loan that is borrowed and repaid in the same transaction. It’s one way to potentially make substantial gains without having to risk your own money.

Most of us are familiar with normal loans. A lender loans out money to a borrower to be eventually paid back in full. A loan typically has to be paid back steadily over months or years. Often lenders require borrowers to put up collateral to ensure that if the borrower can’t pay back the loan the lender is still able to get their money back. This is a secured loan.

Flash loans are unsecured since no collateral is required. This lack of collateral does not mean the lender will not get its money back. Instead of offering collateral, the borrower needs to pay back the money right away. This can be ensured with a smart contract.