Slippage tolerance is an important term that you need to understand before executing a trade on decentralized exchanges. Slippage is one very generic term that you would encounter when using a platform like 1Inchexchange, Uniswap, or similar platforms.
What is Slippage?
When you place a trade using a decentralized exchange, you get an option to set your slippage tolerance. For example, here is a screenshot of Uniswap where one could select the settings button to set their slippage tolerance.
What it meant is, because of your order size, the amount of tokens you can get could be less than what’s projected. In The above example, the tolerance level is 0.5%, and if the liquidity is not available or the price deviation is more, your transaction will not be fully complete.
With Slippage Tolerance, you can set the maximum % of price movement you can live with. Anything above that and your order will fail to execute. The default for Uniswap is 0.5%, but you can set it to any % you want.
Things to keep in mind about Slippage tolerance:
- One solution to this problem is to use smaller transactions for exchange, but as the Ethereum gas fees are rising, it would be costlier to do many smaller transactions than one.
- For popular pairs, usually, the price slippage is low, and should not be a problem. However, when you are transacting with small cap coins, the slippage tolerance might be high, and something you want to keep a check on.
By keeping a tap of stuff like how much liquidity is available, price volatility will help you lower down your slippage tolerance. As the world of decentralized exchanges is growing, it is becoming more important for you to understand the popular terms like slippage, price impact, and others to navigate it like a pro.