Flash Loan Feedback Loops in DeFi: Recursive Liquidity Amplification and Deterministic Control at the Logic Layer

Abstract

Flash loans enable uncollateralized borrowing within a single transaction, providing capital efficiency and arbitrage opportunities in decentralized finance (DeFi). However, when combined with composable protocols and reactive state changes, flash loans can induce feedback loops that amplify liquidity, manipulate pricing signals, and bypass economic safeguards. This paper defines Flash Loan Feedback Loops as recursive transaction patterns in which temporary liquidity repeatedly influences protocol state, enabling extraction of value without proportional risk exposure. We analyze structural conditions that permit such loops, demonstrate why existing mitigations are insufficient, and propose a logic-layer enforcement framework that constrains state-dependent recursion. The approach restores causal integrity between capital commitment and protocol outcomes, addressing a core systemic vulnerability in DeFi architectures.