Flash Loan Liquidation Attacks

Flash Loan Liquidation Attacks occur when an attacker uses a flash loan to manipulate the price of an asset on a decentralized exchange, thereby triggering a liquidation event in a derivative protocol that relies on that exchange for its price data. By artificially depressing or inflating the price, the attacker can force the liquidation of profitable positions and capture the liquidation fee, or even drain the protocol of its collateral.

This type of attack exploits the fact that many protocols do not have adequate safeguards against price manipulation within a single block. It highlights the critical need for protocols to use multiple, decentralized sources of price data and to implement time-weighted average prices or other smoothing mechanisms to protect against transient market manipulation.

Flash loan attacks remain one of the most significant security threats to the stability of decentralized financial derivatives.