All the buyers and sellers submit their orders of how much of a stock they want to buy and sell and at what price. Whenever two buyers and sellers meet at the same price, a trade is transacted.
Slippage is the difference between the price set in the market and the final price at which the trade is executed. In most cases, slippage in trade will cause you to get fewer tokens than you expected. Slippage is common in the world of yield farming and DeFi in general. Learn all about yield farming and DeFi. For example, you place an order for ten tokens, $1 each, and before the order is executed, the price jumps to $2, which generates a slippage error. Slippage can result from multiple factors, all of which are prevalent in the crypto space:
Even though slippage in crypto is something you want to avoid, there can be both positive and negative slippage. Negative slippage occurs when the price is higher than selected initially, and positive slippage occurs when the price is lower than the chosen originally. In the case of negative slippage, you will expect to buy a certain amount of tokens, but you’ll end up getting fewer. In case of positive slippage, which occasionally happens, you can get more tokens than you expected!
Slippage happens when the initial price of a trade and the actual price of the trade executed is different, which can occur for two reasons:
Most exchanges allow you to set a maximum slippage tolerance, and if the slippage percentage is higher than what you’ve chosen, then the trade is declined, and the order will fail to execute. That's why you sometimes see error messages on DEXs. Learn all about DEXs. Depending on the currency you’re trading, you can keep trying to execute your trade at that set slippage tolerance or increase it slightly to find a price you can tolerate. Coins with low liquidity and volume may require a slippage tolerance of 25% or more. However, if you set your slippage too high, you may be doing what’s known as “frontrunning”.
Frontrunning happens when you set the slippage tolerance higher than a certain amount, which means a person or bot can see your transaction and force you to accept the highest possible price based on your slippage settings. Frontrunning is to be avoided, so the best practice is to keep the slippage low and only increase as needed.
The majority of the communities behind coins and tokens will be able to share the best slippage available for a particular coin on average. But keep in mind that this can vary significantly between coins at different times of the day and depending on if we’re in a bull run or a bear market.
Slippage doesn’t only occur with cryptocurrencies; it will also happen when you sell your assets. Slippage can also occur with volatile markets other than crypto. It is essential to DYOR (Do Your Own Research) before starting trading, and Cryptologi.st can give you a hand on that! Check out Cryptologi.st to learn more about crypto terms, news and top coin reviews! We have gathered everything in one place, so you can save your time, clear your mind and make better investment decisions!
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