Such flash loans have beneficial uses, including help for traders trying to capitalize on price differences between cryptocurrencies on different exchanges. In that sense, they are much like the financing that an investment bank might provide to an investment fund to make bets on different stocks or currencies.

But flash loans also have a dark side. There has been a string of recent thefts using flash loans. In addition to the theft Beanstalk disclosed last month, a decentralized- finance platform called Rari Capital said a hacker used a flash loan to help steal about $80 million from it. And Cream Finance said in October a hacker used a flash loan to help steal about $130 million from its platform.

Decentralized finance, or DeFi, is a burgeoning area of the cryptocurrency world that provides financing and liquidity to people trading in its markets. In one sense, flash loans are similar to financing that banks might provide to algorithmic traders who move in and out of positions in milliseconds.

A DeFi platform, such as Aave or Uniswap, is a software program that allows people to build and support apps. Users of the different apps and services deposit cryptocurrencies in accounts within each service. The combined assets on a platform are the pools from which flash loans are made.

Services such as borrowing and lending are handled by “smart contracts,” pieces of code that are written to automate an agreement. These take the place of a loan or bank application that would be used in traditional finance.

Flash loans aren’t a retail tool, though. To use a flash loan, someone needs to be able to code a contract and execute it. The flash-loan portion of the Beanstalk hack, for instance, involved nearly two dozen steps.

What puts the flash in a flash loan is the repayment period: It is almost immediate. A flash loan is both granted and repaid within the same transaction. The life cycle of the loan is about as long as a computer takes to process a transaction.

That is not a lot of time. But in an automated world it is enough to make a trade.

The smart contract has conditions written into it that guarantee repayment. If the borrower doesn’t repay the loan, the contract voids the transaction before it is confirmed, along with whatever market maneuver it was tied to. It is as though the loan never happened and so is an all or nothing proposition. Because of this, there is essentially no credit risk to the lenders.

And because there is no credit risk, the amounts that can be borrowed are limited only by how much capital is held on a specific DeFi platform. Aave, for instance, has about $21 billion of liquidity across its services, held in a variety of cryptocurrencies. 

 In theory, flash loans allow people to use borrowed funds the way financiers do in traditional markets, akin to how an activist investor would use financing to acquire a company, or the way George Soros used borrowed money to bet famously against the British pound.

But the speed of them, the lack of collateral required and the anonymity allowed make them very different in practice. “They open up the potential for things that you wouldn’t even be able to do in the traditional markets and weren’t possible in crypto before,” said Max Galka, the founder and chief executive of the crypto-analytics firm Elementus.

There are several DeFi platforms that allow flash loans, but Aave, where the loans originated, is the biggest. Since 2020, Aave has processed 52,000 flash loans totaling $15.6 billion in market value, according to Elementus. Borrowers pay a small fee for the loan.

That is small compared with the $1.8 trillion total value of the crypto market. But even a few hundred million can be enough to manipulate or attack some of the crypto market’s smaller and less liquid assets. 

For coders who understand how to use flash loans, the potential for malfeasance is huge, said Hassan Bassiri, a fund manager at the crypto-focused investment manager Arca. Because DeFi is such a new field, many services have poor security or badly written code, or both, making the potential for abuse even greater.

“You’re not going to make $80 million in 30 seconds of work doing arbitrage,” Mr. Bassiri said. “There’s so much more profit in the nefarious uses.”

The Beanstalk incident is an example of a hacker using a flash loan to temporarily take over a crypto project. Beanstalk is a stablecoin platform—meaning each token is pegged to the U.S. dollar—where the investors are also the owners. Each person buying a token receives a voting share. Investors are able to propose and vote to make changes to the platform.

A day before the attack, the hacker made a proposal to send money from Beanstalk to Ukraine as aid, though the code directed instead to a wallet the hacker controlled.

The Beanstalk hacker borrowed $1 billion in a flash loan on the Aave platform, in several different crypto denominations, which the hacker used to buy into Beanstalk and momentarily take control of the voting mechanism. Beanstalk’s founders declined to comment. Aave didn’t reply to a request for comment.

In the instant of the attack, the hacker had to do several things in rapid fashion with a computer program: take out the flash loan, buy enough tokens to give the person a voting majority, and vote to approve the proposal from the previous day. Then the hacker sent the funds to another location and sold out of the Beanstalk tokens to repay the original loan.

The result: The hacker drained about $76 million of cryptocurrency in the blink of an eye. 

Write to Paul Vigna at Paul.Vigna@wsj.com