Flash loans in Blockchain / Solidity - Step-by-Step Execution

Concept Flow - Flash loans

Start Transaction

↓

Borrow funds instantly

↓

Use funds for arbitrage or swap

↓

Repay loan + fee within same transaction

↓

If repayment successful

→Transaction succeeds

↓

If repayment fails

→Transaction reverts, no loss

Flash loans borrow funds instantly within one transaction, use them, and repay immediately; if repayment fails, the whole transaction is canceled.

Execution Sample

Blockchain / Solidity

function executeFlashLoan() {
  borrow(amount);
  useFunds();
  repay(amount + fee);
}

This code borrows funds, uses them, and repays the loan plus fee all in one transaction.

Execution Table

Step	Action	State Change	Condition	Result
1	Start transaction	Transaction begins	N/A	Ready to borrow
2	Borrow funds	Balance += amount	Loan available	Funds received
3	Use funds	Perform arbitrage or swap	Funds borrowed	Potential profit
4	Repay loan + fee	Balance -= amount + fee	Sufficient funds	Loan repaid
5	Check repayment	Verify repayment	Repayment successful	Transaction succeeds
6	End transaction	Commit changes	All steps successful	State updated
Exit	If repayment fails	Revert all changes	Repayment failed	Transaction reverted, no loss

💡 Transaction reverts if loan plus fee is not repaid within the same transaction

Variable Tracker

Variable	Start	After Borrow	After Use	After Repay	Final
balance	initial	initial + amount	varies (profit/loss)	initial + profit - fee	updated or reverted

Key Moments - 3 Insights

Why does the transaction revert if the loan is not repaid?

Because flash loans require repayment within the same transaction; if repayment fails, the blockchain cancels all changes to prevent loss, as shown in the exit row of the execution_table.

Can you keep the borrowed funds after the transaction?

No, the borrowed funds plus fee must be repaid before the transaction ends, or else the entire transaction is reverted, ensuring no funds are lost or kept.

What happens if the useFunds step does not generate enough profit?

If the profit is insufficient to repay the loan plus fee, the repayment step fails, causing the transaction to revert as shown in the exit row of the execution_table.

Visual Quiz - 3 Questions

Look at the execution_table, what happens at step 4?

A Transaction ends successfully

B Borrow funds, increasing balance

C Repay loan plus fee, reducing balance

D Transaction reverts

💡 Hint

Check the 'Action' and 'Result' columns at step 4 in the execution_table

At which step does the transaction revert if repayment fails?

A Step 3

B Exit row

C Step 5

D Step 6

💡 Hint

Look for the row labeled 'Exit' in the execution_table

If the useFunds step generates no profit, what is the likely outcome?

A Transaction reverts due to failed repayment

B Transaction succeeds with profit

C Loan is repaid with fee easily

D Funds are kept without repayment

💡 Hint

Refer to the 'Use funds' and 'Repay loan + fee' steps in the execution_table and variable_tracker

Concept Snapshot

Flash loans let you borrow funds instantly within one transaction.
You must use and repay the loan plus fee before the transaction ends.
If repayment fails, the whole transaction reverts, so no loss occurs.
Common uses include arbitrage and swaps.
This ensures risk-free borrowing within a single blockchain transaction.

Full Transcript

Flash loans are a special kind of loan on the blockchain that lets you borrow money instantly but only within one transaction. The process starts by beginning a transaction, then borrowing the funds. You use these funds for something like arbitrage or swapping tokens. Before the transaction ends, you must repay the loan plus a small fee. If you do this successfully, the transaction completes and all changes are saved. But if you fail to repay, the blockchain cancels the entire transaction, so no one loses money. This makes flash loans a powerful tool for quick, risk-free borrowing and trading within a single transaction.

Practice

1. What is the main feature of a flash loan in blockchain?

easy

A. You can borrow funds without collateral but must repay within the same transaction

B. You borrow funds with collateral and repay anytime

C. You borrow funds and repay after 30 days

D. You borrow funds only for staking purposes

Solution

1. Step 1: Understand flash loan basics

   Flash loans allow borrowing without collateral but require repayment in the same transaction.

2. Step 2: Compare options

   Only You can borrow funds without collateral but must repay within the same transaction correctly states no collateral and instant repayment.

3. Final Answer:

   You can borrow funds without collateral but must repay within the same transaction -> Option A

4. Quick Check:

   Flash loan = no collateral + instant repayment [OK]

Hint: Flash loans = borrow now, repay instantly [OK]

Common Mistakes:

• Thinking collateral is required
• Assuming repayment can be delayed
• Confusing flash loans with regular loans

2. Which of the following is the correct Solidity function signature to implement a flash loan callback?

easy

A. function repayLoan(uint256 amount) external

B. function flashLoan(address borrower, uint256 amount) public

C. function startLoan(address asset, uint256 amount) external returns (bool)

D. function executeOperation(address[] calldata assets, uint256[] calldata amounts, uint256[] calldata premiums, address initiator, bytes calldata params) external returns (bool)

Solution

1. Step 1: Identify the standard flash loan callback

   The Aave protocol requires implementing executeOperation with specific parameters.

2. Step 2: Match function signature

   function executeOperation(address[] calldata assets, uint256[] calldata amounts, uint256[] calldata premiums, address initiator, bytes calldata params) external returns (bool) matches the exact signature needed for flash loan execution and repayment.

3. Final Answer:

   function executeOperation(address[] calldata assets, uint256[] calldata amounts, uint256[] calldata premiums, address initiator, bytes calldata params) external returns (bool) -> Option D

4. Quick Check:

   executeOperation signature = function executeOperation(address[] calldata assets, uint256[] calldata amounts, uint256[] calldata premiums, address initiator, bytes calldata params) external returns (bool) [OK]

Hint: Flash loan callback is always executeOperation with specific params [OK]

Common Mistakes:

• Using incorrect function names
• Missing required parameters
• Wrong return type

3. Given this simplified Solidity snippet inside executeOperation:

uint256 amountOwing = amounts[0] + premiums[0];
IERC20(assets[0]).approve(address(LENDING_POOL), amountOwing);
return true;

What does this code do?

medium

A. Transfers the loan amount to the borrower

B. Approves the lending pool to withdraw the loan plus fee for repayment

C. Withdraws the loan amount from the lending pool

D. Rejects the flash loan request

Solution

1. Step 1: Understand the approval call

   The code approves the lending pool contract to spend the loan amount plus premium from this contract.

2. Step 2: Interpret the purpose

   This approval is necessary so the lending pool can pull repayment automatically after the operation.

3. Final Answer:

   Approves the lending pool to withdraw the loan plus fee for repayment -> Option B

4. Quick Check:

   approve() = allow repayment withdrawal [OK]

Hint: approve() lets lending pool pull repayment [OK]

Common Mistakes:

• Confusing approve with transfer
• Thinking it sends funds to borrower
• Missing the premium fee in amount

4. Identify the error in this simplified flash loan executeOperation snippet:

function executeOperation(address[] calldata assets, uint256[] calldata amounts, uint256[] calldata premiums, address initiator, bytes calldata params) external returns (bool) {
    uint256 amountOwing = amounts[0] + premiums[0];
    IERC20(assets[0]).transferFrom(msg.sender, address(this), amountOwing);
    return true;
}

medium

A. Incorrect function parameters

B. Missing return statement

C. Using transferFrom instead of approve for repayment

D. Not calling the lending pool to borrow funds

Solution

1. Step 1: Analyze repayment method

   The code tries to pull repayment using transferFrom from msg.sender, which is incorrect.

2. Step 2: Correct repayment approach

   Flash loans require approving the lending pool to pull funds, not transferring from msg.sender.

3. Final Answer:

   Using transferFrom instead of approve for repayment -> Option C

4. Quick Check:

   Repayment needs approve(), not transferFrom() [OK]

Hint: Repay by approve(), not transferFrom() [OK]

Common Mistakes:

• Confusing transferFrom with approve
• Forgetting to approve lending pool
• Misunderstanding msg.sender role

5. You want to use a flash loan to perform arbitrage between two decentralized exchanges (DEXs). Which sequence correctly describes the steps inside executeOperation to profit and repay the loan?

hard

A. Borrow funds -> Buy low on DEX1 -> Sell high on DEX2 -> Approve repayment -> Return true

B. Borrow funds -> Approve repayment -> Buy low on DEX1 -> Sell high on DEX2 -> Return true

C. Approve repayment -> Borrow funds -> Buy low on DEX1 -> Sell high on DEX2 -> Return true

D. Buy low on DEX1 -> Borrow funds -> Sell high on DEX2 -> Approve repayment -> Return true

Solution

1. Step 1: Understand flash loan flow

   You first borrow funds, then use them to buy low on one DEX and sell high on another to gain profit.

2. Step 2: Approve repayment and finish

   After trading, approve the lending pool to pull the loan plus fee, then return true to complete.

3. Final Answer:

   Borrow funds -> Buy low on DEX1 -> Sell high on DEX2 -> Approve repayment -> Return true -> Option A

4. Quick Check:

   Arbitrage flow = borrow -> trade -> approve -> return [OK]

Hint: Trade first, then approve repayment [OK]

Common Mistakes:

• Approving repayment before trading
• Trying to trade before borrowing
• Not approving repayment at all