Slippage
Slippage is the difference between the expected price of a trade and the actual price at which the trade is executed. It commonly occurs in decentralized exchanges (DEXs) due to the way prices are determined by liquidity pools and fluctuating market conditions.
Influencing Factors
Slippage is influenced by several key factors:
- Market volatility: Rapid price changes can cause the execution price to differ from the quoted price.
- Liquidity depth: Lower liquidity pools magnify slippage, especially for large trades, because fewer tokens are available at the desired price.
- Order size relative to available liquidity: Large orders usually incur higher slippage since they consume liquidity across multiple price levels.
- Bid-ask spread: The difference between the highest bid and lowest ask prices also affects slippage.
Slippage Tolerance
In DEXs, users often set a slippage tolerance, specifying the maximum acceptable price deviation for their trade. If the price moves beyond this threshold during execution, the trade automatically fails to protect the user from unfavorable prices.
Slippage can be positive or negative. Positive slippage means the trade executes at a better price than expected, while negative slippage results in paying more or receiving less than intended.
Minimizing Slippage
To minimize slippage, traders are advised to:
- Break large trades into smaller ones
- Trade during periods of higher liquidity and lower volatility
- Use limit orders when possible to control execution prices
