How to lose money when trading on decentralized platforms 🤔
How do you lose your money when trading on decentralized platforms? We talked before about a way in which traders lose their money on decentralized platforms without their knowledge, which are MEV attacks. Today we will talk about another way in which traders lose their money because of a mistake they make, which is not paying attention to the price impact. For their own transaction (Price Impact). The idea of decentralized platforms is based on liquidity pools. This liquidity is often provided by people to the platform in exchange for a percentage of the transaction fees that occur on the trading pair. The volume of liquidity of the trading pair here is one of the most important things that You should pay attention to it before trading, because if liquidity is low; The effect of transactions on the price movement of the pair is greater, and this increases directly the larger the size of your transaction. The matter is worse if there is an imbalance in the liquidity of the pair. For example, if we have a pair such as ETH/USDC and the liquidity ratio of Ethereum is higher than the liquidity ratio of ETH. USDC.. This means that you may achieve a loss if you sell Ethereum, compared to the market price, because you will get the return of the trading process from a “USDC” liquidity pool that is already suffering from a decline. The same thing happens if the liquidity of the pair is low, even if there is a balance, Especially if the transaction volume is huge, and you can clearly see this in premium currencies, and weak currencies found on platforms such as DexTools and others. A single transaction can affect the currency price by 50%-100% and more. [Of course, the opposite can happen in the case of imbalance, and a profit can be made from trading against the unbalanced pair, and this is called arbitrage trading, but this part is not our topic now. Perhaps We talk about it later]. The difference between Price Impact & SlippageIt is also a common mistake to think that the slippage rate protects you from the price impact of your transactions. The slippage rate only protects you from external changes that occur to the price before your transaction is executed, such as other traders’ transactions, and any changes Other sudden price fluctuations, such as liquidity fluctuations, etc. For example, if you made a transaction with a slippage rate of 1%, and before execution, a sale transaction occurred from another person, which led to a decrease in the price by 2%. In this case, your transaction will not take place, because the slippage rate upon execution was higher than the rate you specified, and here the slippage rate is useful. However, if the price change is a result of your transaction itself (Price Impact), the slippage rate will not protect you from the loss that you will achieve. We conclude with an example. To clarify: Trying to sell 100,000 Ethereum coins for USDC via a decentralized platform... will result in a loss of 28%, or $100 million, because the transaction size is larger than the liquidity available for this pair on any decentralized trading platform, and because of the effect of the transaction size on the price balance of the pair. .Also note in the image that the slippage rate is at a minimum of 0.5%, however, it does not prevent the transaction from achieving a loss of up to 28%. How do you protect yourself from the price impact of transactions? 1) Most trading platforms show you the expected price impact of the transaction before execution. You just have to pay attention to this point before executing the transaction. 2) Trade on pairs that have a lot of liquidity. This means that if a currency has a USDT pair and also a USDC pair, trade on the pair that has greater liquidity. 3) If you want to carry out a huge purchase/sell transaction, execute on several transactions at long intervals of time, and it is preferable to diversify the platforms used, as well as the pairs. 4) Remember The slippage rate, whatever its percentage, will not protect you from loss due to the price impact of your transaction.
