Decentralized finance (DeFi) loan protocol Aave has seen an explosion in the number of flash loans issued — with the daily value of said loans growing more than 1,000% since the start of July from $11 million to more than $130 million as of July 27.
The record loan issuance has seen Aave ascend to rank as the fourth-largest DeFi protocol by locked funds, with nearly $392.9 million in capital currently tied to the project, according to DeFi Pulse.
The value of Aave’s LEND token has also exploded by nearly 500% over less than two months, with LEND rallying into local highs above $0.3 for the first time since price discovery. Aave is now the 34th-largest crypto asset by market cap with $362 million.
Flash loans propel Aave’s market rankings
Aave describes its flash loans as “the first uncollateralized loan option in DeFi,” allowing traders to instantly borrow funds provided that the liquidity is returned to the pool “within one transaction block.”
The loans are intended for use in arbitrage and collateral swapping, allowing users to dictate instructions via smart contract to execute transactions. A 0.9% fee is charged on the gains from the transaction, with the fee being distributed among the platform’s liquidity providers.
Should the borrower fail to meet the loan condition, “the whole transaction is reversed to effectively undo the actions executed until that point” and ensure the safety funds in Aave’s reserve pool.
Flash loan attacks cripple bZx
Despite their new-found popularity on Aave, flash loans have been a part of the crypto ecosystem since the launch of the open-source banking protocol Marble in 2018.
However, flash loans were maliciously leveraged in two attacks that saw nearly $1 million lifted from DeFi lending platform bZx in February by a liquidity provider who was able to manipulate oracle pricing to purchase thousands of tokens at enormously discounted prices.
In analyzing the aftermath of the attack, crypto exchange Coinbase predicted that more “flash loan style oracle attacks” will target the DeFi ecosystem in future — warning that the “combination of flash loans and a web of composable DeFi protocols that interact in complex ways have created [a] new class of vulnerabilities.”