1 Main
Price slippage (English: 'price slippage') is the execution of a market order at a price that differs from the price specified in the order on the exchange.
This phenomenon is characteristic of any assets, including cryptocurrencies. Price slippage most often occurs in the decentralized finance (DeFi) space, particularly on decentralized exchanges (DEX).
Causes of slippage when trading crypto assets can be excessive volatility or, conversely, insufficient liquidity. In the case of on-chain transactions, the speed of transaction confirmation in the blockchain is of great importance.
2 How does price slippage occur?
When placing a market order on an exchange, the user expects the order to be executed at the specified price. However, the actual execution may differ unfavorably — this is called price slippage. It is calculated as a percentage of the nominal value of the transaction.
The cause of slippage can be a high spread, that is, the difference between the selling and buying price of the asset, as well as a low volume of the asset in the order book.
The presence of a large number of participants, high trading activity, and large volumes of the asset at different price levels in the order book — all this ensures high liquidity, that is, the ability to sell or buy as much cryptocurrency as possible at various prices. In such conditions, the likelihood of experiencing price slippage during a trading transaction is virtually zero.
3 Why does price slippage often occur on decentralized cryptocurrency exchanges?
Large centralized cryptocurrency exchanges have long solved the problem of low liquidity. However, specific situations can still arise that may lead to price slippage. For example, this can happen during sharp price movements in the entire market or a specific popular crypto asset. A strong surge in trading volume leads to the trading system being unable to process the flow of orders in time.
A significant delay in order execution is an even more substantial risk for DEX. Trading on such platforms takes place on the blockchain and is entirely dependent on its performance: a new block must appear for the transaction to be executed. If the network used by the trading protocol is slow, its users may face price slippage even during periods of 'calm'.
In most cases, slippage has a minor effect on the price. But when the market for a specific instrument is active, for example, during a bull market, slippage becomes more noticeable.
According to DeFi Llama, the share of productive blockchains in DeFi is growing, such as Avalanche($AVAX ), BNB Chain($BNB ) or Polygon($POL ), but almost 60% of all locked liquidity is on Ethereum, which has low throughput.
4 How is the price spread related to price slippage?
The market spread is the difference that arises between the demand and supply prices in the market and occurs at times when the market is unstable or insufficiently liquid.
When a user makes a purchase 'at market', they agree to the lowest price from the seller. Conversely, they accept the highest price when selling.
An asset that is in high demand has a smaller spread, as market participants compete among themselves and narrow the spread. Popular cryptocurrencies usually have high liquidity.
5 What types of price slippage are there?
The difference in the execution price of the order can be either positive or negative for the trader. Most often, slippage is considered a negative phenomenon, but in rare cases, it can work in favor.
If the actual price of the executed purchase order is lower than expected, slippage is considered positive, as it provides the trader with a better rate at a lower price.
If the final price of the cryptocurrency purchase order is higher than expected, negative slippage occurs, and ultimately the user receives less favorable conditions. This also applies to sell orders for the asset.
Typically, the difference in price arises when executing market orders (Market). Suppose the current price of the crypto asset is $100. The investor wants to sell 20 coins and expects to receive $2000 for them.
However, before the order is executed, the price of the asset sharply decreases to $98. This results in a loss of $2 for each of the 20 tokens. The value of slippage in this case is 2% and indicates a loss for the trader of $40.
6 How to avoid price slippage?
To completely eliminate or minimize the risk of slippage, it is recommended to avoid Market orders at least during periods of high market volatility, and to use limit orders instead.
This type of order is available on all centralized cryptocurrency exchanges, but is absent on decentralized platforms with rare exceptions (for example, in 1inch). This adds a fairly high risk of excessively long order execution due to on-chain operations.
However, there are several basic ways to reduce the risk of price slippage when trading cryptocurrencies on DEX:
If you are trading on an Ethereum-based protocol, it is recommended to increase the amount of gas used; otherwise, the transaction may 'hang' for a long time, up to several hours. The current optimal gas level can be checked, for example, on Etherscan.
Leading DEX on Ethereum often support layer 2 (L2) solutions, the use of which allows for significantly faster order execution and reduced transaction costs.
Many decentralized platforms allow you to manually set the maximum possible value of price slippage when sending an order.
Some centralized platforms for trading crypto assets have special mechanisms to prevent slippage.
