What is Slippage in Crypto: Understanding and Reducing Impact

Slippage has always been a part of the cryptocurrency markets and software solution architect it will continue to be. If you're trading with size, slippage can cost you quite a chunk of cash. In some cases, the difference in slippage when trading 1 ETH vs 100 ETH can be as much as 10%. In the screenshot above, you can expect roughly ~122 UNI tokens for 1 ETH if you swap right away.

How to Prevent Slippage in Crypto Trading?

1. Thinly traded assets with a wide bid-ask spread have greater odds of slippage because there’s a significant difference between buy and sell prices.
2. If there is a limited number of orders at a specific price level, executing a large volume trade can lead to significant slippage as the market depth is insufficient to absorb the trade.
3. A 2% slippage means an order being executed at 2% more or less than the expected price.
4. This delay can lead to price fluctuations during the transaction process, causing slippage.
5. That means more time for a cryptocurrency to change price, leading to increased slippage.

For extra protection, dYdX encourages traders to use limit orders to set their preferred buy or sell price. Slippage does not denote a negative or positive movement because any difference between the intended execution price and actual execution price qualifies as slippage. When an order is executed, the security is purchased or sold at the most favorable price offered by an exchange or other market maker. This can produce results that are more favorable, equal to, or less favorable than the intended execution price.

Slippage is the price difference between when you submit a transaction and when the transaction is confirmed on the blockchain. Two scenarios create slippage when trading on a DEX, so let's cover them. In a nutshell, slippage is the price difference that occurs between a cryptocurrency's quote price and paid cost. With the iron condor strategy, traders can profit when Bitcoin’s price is boring. Learn how to set up an iron condor and when to use it for trading crypto.

The less liquid in the pool, the more your trade will be impacted by slippage. Taking the Uniswap example above, perhaps the app quotes you ~122 UNI tokens, but you end up with 121 UNI, or if you're lucky, more than the quoted swap. This guide to understanding slippage and avoiding it on DeFi exchanges like Uniswap & PancakeSwap has everything you should know. Some platforms allow investors to place an order while specifying the maximum amount of slippage they are willing to accept in percentage terms. The function of the Slippage tolerance is to protect you from a sudden change in the price of the token that you are about to buy, sell or exchange (swap).

The ideal slippage rate depends on each trader’s goals and risk tolerance. Although 0.5% is the standard rate on most crypto exchanges, investors should adjust slippage tolerance according to their risk resistance before trading. Remember, a 0.5% slippage tolerance means paying 0.5% more or less than the quoted price. It can also be more challenging to match buyers with sellers in markets for small and obscure altcoins (or non-Bitcoin/Ethereum).

Assets in high demand have smaller spreads as market makers compete and narrow the spread. Slippage is a common occurrence in crypto trading, yet not many traders and investors are aware of it. While removing this phenomenon altogether is impossible, you can improve your odds a lot by understanding it first. Other elements to consider are exchanges and trading platforms themselves. Popular centralized exchanges use the order book method to facilitate trading.

Can you avoid slippage?

Of course, market volatility seriously affects the price you pay for a cryptocurrency. For example, say you agree to buy a coin at a certain price, but by the time your transaction goes through the coin has become more expensive. In highly volatile markets, rapid price fluctuations can lead to more substantial slippage, making it important for traders to be mindful of market conditions before making their trades. This insight helps in setting more effective trade strategies, such as using limit orders to cap potential slippage. The primary cause of slippage in DEXes is the fluctuation in token prices due to market forces and the liquidity available in the what happened to oil prices in 2020 pools.

Limit Orders

In the decentralized exchange world, platforms like Uniswap and PancakeSwap operate without a regulatory authority. This means they rely purely on the liquidity in the system for executing trades, and as a result, are more susceptible to low liquidity risks. Typically though, decentralized platforms have default slippage rates ranging from 0.5% to 1% and then traders can customize their slippage tolerance according to their preferences. Plus, these platforms don’t have the same types of centralization risks as centralized exchanges, so you can transact with more confidence in the network’s security. Ultimately, slippage is something that every trader has to deal with in one way for those of you that trade "28 pairs" or another.

The longer your transaction is stuck in processing mode, the more prices can change, potentially leaving you with fewer tokens in return. You see, decentralized exchanges are all hosted on blockchains like Ethereum, Binance Smart Chain, and Solana. So unlike centralized exchanges, a DEX trade doesn't process instantly.