Slippage In Crypto - What is it?
4 min read

Slippage In Crypto - What is it?

Slippage In Crypto - What is it?

Summary:    

In this article, Saddle focuses on slippage in crypto. Slippage can occur in all markets (bonds, futures, etc.), both as positive and negative slippage.

Learn about slippage – Saddle will also give you some useful tips to reduce slippage when it’s negative.

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What is slippage?

Slippage is simply the difference between the price at which you expect to settle a trade and the price at which your trade is actually executed.

When you are about to complete a trade, the price of the asset you choose may vary even in a few seconds, and that’s why the price at which you buy or sell your asset can be different from the one you expected.

This is not always a negative thing: if you’re buying and the price rises, you’ll lose your money – negative slippage, but if you’re buying and the price drops, you’ll save money – positive slippage.

When and why does slippage occur?

As stated, slippage occurs when traders and investors need to choose a different cost than what they originally requested. Slippage can occur in all markets, but its effects can be more evident – and dangerous – in crypto trading due to: the high volatility of the crypto market, price changes during the time between the order gets in the market, and the execution of a trade. These factors can cost you a significant portion of your capital.

Alternatively, it can happen as a result of order size – especially as a result of low liquidity: as you will see in our practical example, you may be forced to choose an expensive option.

An example of slippage

Let us give you a rough basic example of how slippage occurs. Let's assume that you want to buy 10 apples, and one person has 10 apples — selling them at $1 each.

Another person has another 10 apples, and sells them at $2 each.

Finally, a third person has 10 apples, selling them at $3 each.

You try to buy your apples at $1, but by the time you make the trade the seller has already sold 5 of them. You still need five more apples to complete your purchase.

So in that case, you go to the next cheapest option, but seller number two has already sold seven apples — you've only got three left.

You buy the three apples from that seller at $2 apiece — $6 in total, and then to complete your order you need to move over to the final seller — where you spent $6 on the last two apples.

You thought you were going to buy 10 apples for $1, because that was the cheapest price. But because of slippage, you ended up buying 10 apples for a total of $17 — which in this example would be a 70% slippage rate.

Slippage on the crypto exchange: strategies to minimize losses

Slippage can occur on both decentralized and decentralized exchanges, and in both cases you can use some strategies to minimize losses due to slippage.

One of these strategies consists of using limit orders instead of market orders. With limit orders, you can choose the exact price at which your trade must be executed, and the exchange will try to choose the less expensive option even when there is not sufficient liquidity.

You can also set the degree of slippage you’re willing to accept – usually, you can set a percentage value.

You should also be cautious in this case because if the slippage you set is too low, you may lose the possibility to make profits, since your order might not be executed.

If the slippage is too high, you may incur in what is known as “front–running” – that is, another trader or a bot may intercept the slippage you set and force you to buy or sell at the less favorable price.

This comes, in many cases, with zero benefits other than simply executing the trade quickly.

Traders want to find a balance between getting their trades through quickly — especially when dealing with hype coins, increasing in expected price significantly- and not front running the trade so you're paying more for your coins when you need to.

Now the majority of communities behind coins and tokens will be able to share the best slippage available for a particular coin on average. However, keep in mind that this will vary significantly between coins during the day, and according to where the market is as a whole.

How Saddle manages to keep a low crypto slippage

Saddle is well known for being an exchange with a low slippage.

First off, we focus on pegged-value assets – stable by nature, though not affected by high volatility.

To avoid slippage, Saddle uses the Stableswap Algorithm, which manages to find the good solution even when markets are less liquid.

Conclusions

Slippage may cause you high losses, and this is true especially with cryptos: their volatility makes traders experience dramatic levels of slippage in a few seconds.

Both centralized and decentralized exchanges give you some tools to avoid slippage, but both have downsides: orders might not be executed and traders may incur in front-running if they choose the wrong level of slippage. But how do you choose the right one considering that liquidity strongly affects slippage and that it changes according to assets and exchanges?

Saddle finds a good compromise – it’s famous for being a low slippage and fully decentralized platform. If you want to know more about Saddle, join the community and read more about our work.

Learn more about Saddle.

Use the dApp.

Join the community and earn SDL.