What is Slippage and why does it matter? (Uniswap example)
One of the most common pieces of advice DeFi newcomers receive from “veterans” is “watch out for slippage.” But what does it actually mean?
What is slippage?
Imagine wanting to buy 10 apples at the market and seeing that the various apple vendors are selling them for $1 each. That’s a $10 cost — easy. But what if there was breaking news that apples cure COVID-19 and the price skyrocketed to $100/apple? Now you’re out $1,000 for the same 10 apples. When trading crypto, the volatility in asset price can create such a situation where the executed price is different from the quoted and expected price. Slippage is the expected % difference between these quoted and executed prices.
Low liquidity can also cause increased slippage, which is why larger orders tend to face higher slippage. This is generally a problem with market orders. When placing limit orders, your trade will only get executed at or above the limit price. But with market orders, you buy at the price at which the market is willing to sell.
When you use Uniswap, you will see an interface like this:
Note both the Slippage Tolerance and the Price Impact settings. With Slippage Tolerance, you can set the maximum % of price movement you can live with. Anything above that and your order will fail to execute. The default for Uniswap is 0.5%, but you can set it to any % you want.
Price impact gives you an idea what slippage to actually expect based on the size of the order you’re placing and what’s going on in the market. This helps you get an idea of how much of the desired token you are likely to actually receive once the trade executes.
The Minimum Received indicator is the least amount of tokens you will receive based on your slippage tolerance (a worst-case scenario — anything below and the transaction gets automatically canceled).
The most common strategy is to break up your order into small chunks and look\wait for any counter transaction to keep the slippage low. But there are a couple of nuances to consider:
- Each transaction has its own gas fee. Especially if the gas fee is high when you are executing these many micro-trades, you could lose more in gas than gain in preventing price slippage.
- Keep in mind that any trade moves the price of each of the two tokens being swapped between. This movement may be insignificant for assets with large liquidity/market cap and/or trades with low volume. But if you place a large swap order for a token with a small market cap or liquidity, you can move the price by a lot. Practically, you are making each subsequent micro-swap between these two assets more expensive for yourself.
With that in mind, there is no 100% “right” way to approach slippage. You need to consider how volatile the price is at the moment, how liquid the asset, the proportion of your swap’s volume to the asset’s cap and liquidity, and a number of strategic factors specific to your situation. You can also learn from the pros by finding your favorite active wallets and then following them (and copying their trades) with our Wallet-to-Wallet Copying Interface.
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