What is Slippage in DeFi Trading?
Slippage refers to the difference between the expected price of a trade and the actual price at which the trade is executed. In the context of Decentralized Finance (DeFi) trading, slippage can occur due to various factors such as market volatility, liquidity shortages, or delays in transaction confirmations on the blockchain.
Types of Slippage
- Positive Slippage: When the execution price is better than expected, leading to a more favorable outcome for the trader.
- Negative Slippage: When the execution price is worse than the expected price, potentially resulting in losses or reduced profits.
Causes of Slippage
Two major factors contribute to slippage in DeFi trading systems:
- Market Volatility: Rapid price movements can cause the price at which a trade is executed to differ from the anticipated price.
- Liquidity: Lower liquidity in a trading pair can lead to larger price deviations when executing trades.
Minimizing Slippage
To reduce slippage, traders can:
- Use limit orders instead of market orders.
- Trade during periods of high liquidity.
- Adjust their slippage tolerance settings in their trading interface.