Understanding Slippage

What is Slippage?

Slippage is a common phenomenon in trading that refers to the difference between the expected price of a trade and the price at which it is actually executed. In DEXs, slippage occurs due to the decentralized nature of the platform, where trades are executed on-chain, rather than through a centralized order book like in traditional exchanges.
In DEXs, slippage occurs when the liquidity of the market is not sufficient to accommodate the size of the trade being executed. This results in a higher price impact, as the trader must trade against a less favorable price in order to execute the trade. This can lead to increased trading costs, reduced profits, and lower confidence in the accuracy and fairness of the DEX.

What causes Slippage?

Lack of liquidity

One of the primary causes of slippage in DEXs is a lack of liquidity in the market. DEXs rely on liquidity providers to maintain liquidity in the market, and if there are not enough traders participating in the market, the liquidity can become thin, resulting in slippage.

Price volatility and market movements

DEXs are more susceptible to price volatility and market movements due to their decentralized nature. This can lead to sudden price changes that can cause slippage for traders.

Impermanent loss in liquidity pools

Liquidity pools are used in DEXs to facilitate trading and provide liquidity for traders. However, the price of assets in the pool can change, resulting in impermanent loss for liquidity providers. This can cause slippage for traders who trade against the liquidity pool.

Front-running and other forms of market manipulation

DEXs are vulnerable to front-running, where traders can see incoming trades before they are executed and adjust their own trades accordingly to benefit from the price impact. This can cause slippage for other traders who are unaware of the front-running.