In the process of DeFi (decentralized finance) trading, slippage is a concept you are likely to encounter. Whether you are swapping tokens or joining a liquidity pool, the occurrence of slippage may affect your profits and trading experience. Today, we’ll dive into what slippage is, why it occurs, and how to effectively address the challenge of slippage in DeFi.
What is slippage?
Slippage, simply put, is the difference between the transaction price and the expected price. In DeFi, when you trade tokens, the actual execution price may not be exactly the same as the price you saw when you placed the order. The difference is the slippage. This usually occurs when markets move rapidly or there is insufficient liquidity.
For example, if you plan to buy a certain token for $100, and the price you see on the trade is $10 per token, you would expect to buy 10 tokens. However, when the trade is actually executed, you may end up buying only 9.8 tokens due to changes in market price, and this is the impact of slippage.
Cause of slippage
The main causes of slippage can be attributed to the following points:
- Market Volatility: In situations where market prices fluctuate rapidly, there may be significant differences in prices between buyers and sellers, especially in high-volatility cryptocurrency trading.
- Lack of Liquidity: Liquidity refers to the amount of a token that can be bought and sold in the market. If the liquidity of a certain trading pair is insufficient, a single transaction may have a greater impact on the token price, leading to slippage. This is especially common with some smaller DeFi projects or emerging tokens.
- Large trades: When you place a large trade, the order volume may exceed the available assets in the liquidity pool, causing the price to gradually rise or fall during the process of completing the entire trade, causing slippage.
How slippage affects you
Slippage may cause certain losses to investors, especially when the market is volatile. Suppose you are executing a trade and the token price suddenly changes, you may purchase the token at a much higher price than expected, thus increasing the cost of your investment. Therefore, understanding and managing slippage is crucial for DeFi investors.
How to reduce the impact of slippage?
When faced with slippage, there are some methods we can use to reduce its impact on trading.
- Set slippage tolerance
Most decentralized exchanges (DEX) allow users to set slippage tolerance (Slippage Tolerance) before trading. This option helps you avoid unnecessary losses by canceling a trade if the price moves too much. For example, if you set your slippage tolerance to 1%, then when the transaction price exceeds your expected price by 1%, the transaction will be automatically canceled.
- Choose trading pairs with higher liquidity
Choosing trading pairs with higher liquidity can effectively reduce slippage. High liquidity means that there is sufficient supply of funds in the market, which can reduce the impact of a single transaction on market prices. Therefore, when selecting trading pairs, you can give priority to some large-capitalization tokens or popular liquidity pools, which can reduce the risk of slippage.
- Avoid trading during periods of high volatility
Slippage is often most obvious when the market is volatile. Therefore, trading away from periods of high market volatility can also effectively reduce slippage. When the market is in a relatively stable state, token price changes are smaller, allowing the impact of slippage to be better controlled.
- Split large transactions
If you need to make a large transaction, consider breaking it up into smaller transactions. This can reduce the impact of a single transaction on the market price, thereby reducing losses caused by slippage. While doing this may add some fees, it can help you save money from slippage in the long run.
The difference between slippage and impermanent loss
Many people tend to confuse slippage and impermanent loss. Although both are common risks in DeFi, they are different in nature. Impermanent losses refer to the reduction in income due to changes in market prices when you put assets into the liquidity pool, while slippage refers to the difference between the final transaction price and the expected price due to fluctuations in market prices during the transaction process. difference between.
Slippage usually occurs during the execution of a single trade, while impermanent losses occur when you hold an asset and the price changes. Therefore, understanding the difference between the two will help you better deal with various challenges in the DeFi world.
Become the Master of Slippage: How to Trade Smartly in DeFi
Slippage is an inevitable part of the DeFi world, but with sound strategies, you can effectively minimize the impact of slippage. I hope today’s sharing can help you better understand the concept of slippage and learn how to deal with this challenge.
When trading in DeFi, staying calm, setting appropriate slippage tolerances, and choosing markets with higher liquidity to trade are all good ways to reduce the risk of slippage. Understanding the dynamic changes in DeFi, keeping up with market information at any time, and making trading decisions based on your own risk tolerance are also important means to reduce the risk of slippage.
At the same time, maintaining sufficient flexibility is also crucial. Sometimes, splitting a large transaction into multiple smaller transactions for execution, or trading when the market is more stable, can greatly reduce the impact of slippage. Don’t rush into a trade, especially when prices are volatile. You should make a detailed plan and always follow this plan for your investment operations.
In addition to technical responses, psychological preparation cannot be ignored. The world of DeFi is full of opportunities, but it also comes with risks. Slippage is only part of the challenge. True success requires you to have a comprehensive understanding of the entire DeFi ecosystem. Understanding the market operation logic behind slippage and learning to identify when to enter and when to exit will make you more comfortable on the journey to decentralized finance.
Ultimately, what we are pursuing is not just short-term trading profits, but the ability to build an investment strategy that will lead to stable growth. When faced with the challenge of slippage, knowing how to manage risks and how to find balance in turbulence are essential abilities for becoming a successful DeFi trader.
I hope you can calmly face the challenge of slippage, achieve stable growth, and ultimately become a wise and confident trader in your DeFi journey, and find your own path to success in a world full of opportunities and challenges.
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About LayerPixel：
LayerPixel is an all-in-one DeFi protocol designed specifically for the TON blockchain and seamlessly integrated with Telegram Mini Apps. Leveraging a modular architecture, LayerPixel overcomes the asynchronous limitations of TON while harnessing its sharding benefits.
At the core of the LayerPixel ecosystem are several innovative components:
- PixelWallet - An SMC wallet with Account Abstraction (AA) features, enabling users to interact with dApps and the LayerPixel ecosystem with ease.
- PixelSwap - The first modular DEX on TON, supporting advanced trading models like weighted pools and LBP.
- Pixacle - A decentralized oracle solution delivering fast and accurate price data to dApps and smart contracts.
LayerPixel’s future plans include becoming a cross-chain solution to power DeFi experiences across all Telegram Mini Apps. By providing an all-in-one platform, LayerPixel aims to make blockchain-powered finance accessible to everyone within the TON ecosystem.
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