What is Slippage in Trading?
In the context of decentralized exchanges (DEX) within the decentralized finance (DeFi) ecosystem, slippage refers to the difference between the expected price of a trade and the actual price at which the trade is executed. This phenomenon is particularly prominent in cryptocurrency trading due to market volatility and varying liquidity across different trading pairs.
Types of Slippage
- Positive Slippage: This occurs when a trade is executed at a better price than anticipated, allowing traders to benefit from favorable market movements.
- Negative Slippage: This is more common, where the execution price is worse than expected, resulting in additional costs for the trader.
Factors Contributing to Slippage
Several factors can contribute to slippage in DEX trading:
- Market Volatility: Rapid price changes can lead to discrepancies between the expected and actual execution price.
- Order Size: Large orders can impact liquidity, resulting in worse execution prices.
- Liquidity of the Pair: Less liquid pairs are more susceptible to slippage.
Minimizing Slippage
To minimize slippage, traders can use strategies such as setting slippage limits, opting for limit orders instead of market orders, or trading during periods of high liquidity.