What is Slippage? 03 ways to avoid slippage when trading Crypto

What is Slippage? What are the causes of price slippage? Here are 03 solutions to help avoid or minimize slippage when trading Crypto!

Many of you are familiar with Order-book transactions at CEX exchanges, so you don’t understand the working mechanism of AMMs and often encounter a case that after completing a transaction, your account will lose a lot of money.

At this point, many of you will think it is due to transaction fees, but that is not the case, the exact cause is due to Slippage, also known as Slippage. So what is Slippage?

In this article, idolmeta.net will answer you about Slippage problems, including:

• What is slippage or slippage? How to calculate slippage?
• What causes price slippage?
• How to avoid or minimize the Slippage level when trading Crypto?

What is Slippage?

Slippage (or slippage) is the difference between the theoretical price you see on the floor and the actual price you pay.

Slippage is often encountered when trading on AMM DEX exchanges for reasons that may not be large liquidity, Front run of bots,…

Thus, when making a transaction on AMMs, you will have to bear 2 fees:

• The first is the % transaction fee from Protocol (for example, Uniswap has a transaction fee of 0.3%, on PancakeSwap it is 0.2%).
• The second is the slippage (Slippage).

For example, Brothers make a transaction of 1000u to buy 5 BNB for $200/BNB. After deducting the Protocol fee of 0.2%:

• According to the theoretical price, you will get almost 5 BNB.
• However, in reality, you only get 4.7 BNB.

About 0.3 BNB the other difference is Slippage.

Causes of price slippage

There are 3 main causes of price slippage:

The market is volatile

When the market fluctuates strongly, whether negative or positive, that is also the time when many investors compete for orders.

For example: You were going to sell ETH for $2,000, but because of low gas fees, someone sold it before you ⇒ Caused the price of ETH to drop.

So when it’s the brother’s turn to be executed, the price will probably be as low as $1,950 or $1,900.

The market is not liquid enough

This is the same as when trading on CEX centralized exchanges, Buy wall and Sell wall only have a few ETH, but you want to sell 1,000 ETH quickly once, then the price will drop very sharply.

Similarly, the liquidity on AMM will be based on the Pools, if the liquidity in those Pools is too little but you want to trade a lot, the liquidity will definitely decrease very sharply.

For example, Below is a picture of me trading the BUSD – ONT pair.

I want to swap 2,000 BUSD to ONT. When you trade on regular CEX, $2,000 is not a big number.

However, in PancakeSwap, the ONT pool contains almost no liquidity, leading to a price slippage of 64%, just click buy 1 time to split 4 accounts.

So this is absolutely not beneficial for you when buying ONT on PancakeSwap.

Front Running Bot

Front-running Bot is the fact that Bots take advantage of KNOWING a future transaction that affects the price and place orders right before that transaction to make a profit for themselves.

Front Running will affect the price and create slippage in the following way:

1. Front-running bots see a potentially front-run trade (the slippage is large enough, the price impact is high enough to be profitable).
2. Insert a buy order with a reasonable size and volume (because the buy order will also affect the price) before the user’s order.
3. Discharge immediately after the user command is executed. The profit of bots lies in the user-generated slippage, which facilitates buying at low prices and selling at high prices.

03 ways to avoid slippage when trading

Based on the above reasons, when trading on AMMs, you need to pay attention to a few things:

Firstly, avoid peak hour trading.

Second, if you accept transactions at peak times, you should set the Slippage volatility level that you can accept.

If you use AMMs on Coin98 Wallet, click on the Setting icon to select the appropriate Slippage Tolerance level.

For example: Slippage is 1%, if you choose “Slippage tolerance is 5%”, then you are agreeing that the Slippage level will be in the range: -4% < Actual Slippage < 6%.

If during the waiting period, the market fluctuates strongly and the Slippage actually falls out of this range, your trading will stop.

Finally, to avoid transactions that slip too high, you should pay attention to the Price Impact parameter.

If this parameter is high, it means you are trading a large amount compared to what the Pool can provide, you should look for other Pools to trade.

Epilogue

If in centralized exchanges (CEX), the exchange will be the one to actively provide liquidity, they must provide at a level sufficient for you to trade.

while in decentralized exchanges (DEX), liquidity is voluntarily contributed by everyone, so many Pools may have little liquidity, leading to high slippage if you trade.

Above is an introduction to Slippage and solutions to help you avoid trading with high Slippage. If you have any questions, please comment below so that Idolmeta.net can help you right away!