What is Slippage?

May 20, 2021 1 min read

Slippage is a characteristic of modern, high speed financial markets, where the price at which an order is requested is not the same as the one at which it is executed. This happens because the price shifts in the small amount of time required to put the order through. Slippage is a result of trading activity led by high-speed computer programs, which respond to market changes much more rapidly than human operators.

In DeFi, wallets and exchanges usually offer information about the predicted slippage before users make any requests for an order. The effect of slippage on the price may be positive or negative; i.e. it may end up either benefiting the user or harming them depending on the direction in which it occurs. To keep such unpredictability at a minimum, wallets offer slippage settings where a slippage tolerance can be defined (usually 1 - 3%). During the execution of the order, if the percentage slippage exceeds this limit, then the transaction does not go through and the order is cancelled.

Another strategy of dealing with slippage includes breaking up an order into smaller transactions. Slippage is most unpredictable when there are large orders being requested for a currency with relatively low liquidity, i.e. the amount of a currency that is available to swap for a given asset is relatively low. Hence breaking orders into smaller pieces is sometimes beneficial in order to avoid surprises. Yet, one has to be careful as multiple transactions can rack up a high gas fee (which is calculated per individual transaction). This strategy is not viable when the prevailing price for gas on the network is high.

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