What is Slippage in Yield Farming?
Slippage refers to the difference between the expected price of a cryptocurrency transaction and the actual price at which the transaction is executed. In the context of yield farming, slippage can significantly impact the profits that investors hope to achieve.
Understanding Slippage
When a yield farmer tries to swap or stake tokens, the liquidity of the market and the size of the transaction can lead to price fluctuations. These fluctuations cause the transaction to execute at a different price than intended, resulting in slippage. This can be more pronounced in less liquid markets.
Types of Slippage
- Negative Slippage: Occurs when the executed price is worse than expected, leading to lower returns.
- Positive Slippage: Happens when the executed price is better than expected, which can result in higher returns.
Managing Slippage
To manage slippage, yield farmers can:
- Set slippage tolerance levels during transactions.
- Avoid executing large trades on illiquid pools.
- Use limit orders when available.
Conclusion
Understanding slippage is crucial for yield farmers to optimize their strategies and minimize unintended losses, ensuring more effective management of their investments.