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The key point is that there is a delay between your confirmation of the transaction and the blockchain's confirmation of the transaction. The asset's price may change somewhat or significantly in the interval between those two confirmations.

What is Slippage?

Cryptocurrencies worth billions of dollars change hands every day without the use of middlemen, regulators, or centralized exchanges.


What else could be groundbreaking if that? Decentralization offers many benefits, but DEX trading still has issues that need to be resolved. A case in point is slippage.

Slippage is the price discrepancy between a cryptocurrency's quote price and paid cost, to put it briefly. Slippage is annoying, but it doesn't have to be!

But what is Slippage?
The cost differential between when you submit a transaction and when it is confirmed on the blockchain is known as slippage. Let's talk about the two situations that cause slippage when trading on a DEX.

As you know, all decentralized exchanges use blockchains like Polygon, Ethereum, and Binance Smart Chain as their hosting platform. Therefore, a DEX trade doesn't process instantaneously like it does on controlled exchanges.

The key point is that there is a delay between your confirmation of the transaction and the blockchain's confirmation of the transaction. The asset's price may change somewhat or significantly in the interval between those two confirmations.

Slippage often has very little effect on price. However, slippage becomes more noticeable when a specific cryptocurrency is in high demand or when there is a lot of trading activity (i.e., during a bull market).

Low Liquidity affecting Slippage
In reality, decentralized exchanges are nothing more than protocols that crowdsource liquidity and offer smart contracts that let users trade using that liquidity. Liquidity pools hold the liquidity in decentralized exchanges.

Trading on a DEX is equivalent to adding one token to the pool and taking another one out. The more trades you make or the pool sees overall, the more the liquidity in the pool gets unbalanced and price slippage occurs. For instance, depending on how much liquidity the pool contains, if you want to exchange 1000 ETH for MATIC, the price per MATIC token will increase in relation to the listed price.

The more slippage will affect your trade, the less liquid the pool is.

As you can see, the price impact is 70.80% on QuickSwap in this example.

Slippage can be very inconvenient. Nobody enjoys receiving fewer tokens than they anticipated. When trading on QuickSwap or other significant decentralized exchanges, how can slippage be prevented? Below, we'll outline a few methods for avoiding slippage.

How to avoid it though?
Keep in mind that price slippage occurs between the time you confirm a transaction and the time it confirms on the blockchain.

When there are many transactions backing up the blockchain, miners prioritize and process the ones paying the most gas. This obvious fact leads to a few remarkably efficient slippage reduction techniques.

ā€“ Increase the Gas Fee
When block space is limited and everyone is attempting to process their transaction, slippage is frequently experienced. Your QuickSwap trade may spend hours in pending status if you utilize low or standard amounts of gas during these times. Prices are subject to change, which may result in you receiving fewer tokens in return the longer your transaction is stalled in processing mode. Increase the gas on your transaction to steer clear of situations like this.

ā€“ Adjust Slippage Tolerance
You may alter slippage tolerance on the majority of decentralized exchanges. For various scenarios, you can raise or lower your slippage tolerance percentage to ensure that your transaction is picked up.

If you're trading during a market's peak hours, you should anticipate some rather large swings in slippage percentage. Your transaction won't be confirmed if your slippage tolerance is set too low since it continues missing your target. However, if you make your slippage tolerance too high, you can end up paying more per token than you wanted to. The level of slippage tolerance that is appropriate for you will rely on your bigger plan and is extremely individualized.

Keep in mind that if your slippage is set too low, it may result in several failed transactions that continue to drain your gas.

Conclusion
Slippage is a pain, but if you manage it correctly, and follow up on the tips and tricks in this article, you might get an extra 1-5% income annually from just this.
And remember, it is sometimes better to buy crypto from DEXs in smaller chunks repeatedly, than buying it all in one transaction!


Written By

Petrache Ionut

Jun 27, 2022