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🔄 How Flash Loans Work: Atomic Transactions

Understand borrow-execute-repay in a single blockchain transaction

Borrow millions with no collateral in seconds

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⚙ī¸ How Flash Loans Work

Flash loans leverage blockchain's atomic transaction property: either all operations succeed, or everything reverts. This guarantees lenders get repaid with zero risk.

🎮 Interactive Transaction Simulator

Watch a flash loan transaction flow through all stages. Click "Run Simulation" to see the process.

💰
Borrow
⚡
Execute
↩ī¸
Repay
✅
Complete

Borrow: Request flash loan from protocol

Your smart contract calls the flash loan provider (Aave, dYdX, Balancer) and requests a specific amount. The protocol instantly transfers funds to your contract.

flashLoanProvider.flashLoan(borrowAmount, executionData)

Smart Contract Execution Flow

1

Request Flash Loan

Your contract calls the provider's flashLoan() function with the amount and callback address. Provider transfers funds immediately.

2

Execute Callback

Provider calls your contract's executeOperation() function. Here you implement your custom logic: trades, liquidations, swaps, etc.

3

Approve Repayment

Your contract approves the provider to pull back the loan amount + fee. This happens automatically at the end of your callback function.

4

Validate Repayment

Provider checks if your contract has sufficient balance. If yes, transaction completes. If no, entire transaction reverts (no loan ever happened).

🔒 Atomicity: The Secret Sauce

Flash loans only work because of blockchain's atomic transaction property. In an atomic transaction, either ALL operations succeed or ALL operations fail. There's no middle ground.

✅ Success Path

  1. 1. Borrow 1M USDC ✓
  2. 2. Arbitrage nets 2K USDC ✓
  3. 3. Repay 1,000,900 USDC (0.09% fee) ✓
  4. 4. Keep 1,100 USDC profit ✓
  5. Result: Transaction confirmed

❌ Failure Path

  1. 1. Borrow 1M USDC ✓
  2. 2. Arbitrage fails (front-run) ✗
  3. 3. Can't repay 1,000,900 USDC ✗
  4. 4. Entire transaction reverts ✗
  5. Result: Nothing happened (like time travel)
💡 Key Insight: Because of atomicity, lenders have ZERO risk. If borrowers can't repay, the loan never happened. This enables uncollateralized lending - impossible in traditional finance.

đŸĻ Flash Loan Providers

  • â€ĸAave: 0.09% fee, largest provider, supports most tokens
  • â€ĸdYdX: 0.05% fee, specialized for margin trading
  • â€ĸBalancer: 0.05% fee, flash loans from any pool
  • â€ĸUniswap V3: 0.05-1% fee (per pool), concentrated liquidity

⚡ Technical Requirements

  • â€ĸSmart Contract: Must implement executeOperation() callback
  • â€ĸGas Budget: Complex logic costs $100-500+ in gas
  • â€ĸTiming: All steps must complete in ~15 seconds (block time)
  • â€ĸTesting: Thoroughly test on testnet to avoid failed transactions