Whenever you expected to buy a certain amount of tokens but ended up getting a lot less, you might’ve experienced what is called slippage. Slippage happens when the price between the initial cost of a trade and the actual cost of the executed trade is different.
What Is Slippage In Crypto?
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:
- Low liquidity
- High price volatility
- Low trading volume
Positive And Negative Slippage
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!
Two Common Slippage Scenarios
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:
- Slippage can happen because of a delay in the buying process — you open the application, see the prices and take some time to decide how much you’re going to trade. These are all time-consuming, so chances are the price of that asset has changed by the time you want to finalise your trade.
- Slippage can also happen because of the number of tokens you want, which is more with bigger orders. An example is when you place an order of 100 tokens, which sometimes cannot be bought directly from one seller. A seller has 100 tokens at $1 each, but half of the first seller’s tokens are already sold, and they only have 50 tokens available for sale. The system gets you the 50 tokens at $1 each, then skips to the next seller. The next seller sells each token for $2 and has 30 tokens available for sale. The system gets the 30 tokens and moves on to the next seller. The other seller has each token for $3, so you get 20 tokens. Your order of 100 tokens is complete, but the minimum price for the tokens was $100. The slippage and availability in the market caused you to bet the 100 tokens for $170 instead, which results in a 70% slippage rate.
How To Avoid Slippage In Crypto?
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”.
What Is Frontrunning In Crypto?
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.
Communities Help Reduce Slippage Error
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!