What Is Slippage?
Also known as: Price Slippage, Slippage Tolerance, Price Impact
In short
Slippage is the difference between the expected price of a trade order and the price at which it is actually executed; it usually results from low liquidity, large trade size or price changes between order placement and execution.
When a market order is placed on centralized exchanges, if the quantity at the first price level in the order book is insufficient, the order also fills at worse price levels and the average price deviates from the expectation. In automated market makers (AMMs) on decentralized exchanges, on the other hand, the price is determined by the ratio of assets in the pool. Because a large purchase changes the pool's balance, the unit price rises as the trade gets larger; this is called price impact.
For example, someone who wants to buy $10,000 worth of a token in a small pool may end up buying at an average of $1.03 instead of the $1 price shown on screen; this is a 3 percent slippage. In addition, after a transaction is sent, other people's transactions can change the price until it is included on-chain. For this reason, decentralized exchange interfaces offer a 'slippage tolerance' setting; if the price slips more than the specified percentage, the transaction is canceled.
Setting the slippage tolerance too high exposes the transaction to MEV strategies such as sandwich attacks: bots can step in before and after the transaction and turn the difference the user allowed into their own profit. A tolerance that is too low can cause transactions to fail frequently and gas to be paid in vain. Splitting large trades, using limit orders and trading in highly liquid markets are common ways to reduce slippage.
Last updated: · This content is for information purposes only and is not investment advice.