What is Slippage?
Slippage refers to the difference between the expected price of a trade and the actual price at which the trade is executed. It is a common phenomenon in trading, especially in volatile markets, where asset prices can change rapidly within a short period.
What Is Slippage Tolerance
Slippage tolerance is a setting that can be defined on various DeFi platforms to help limit the amount of slippage suffered when making a trade.
In the context of decentralized exchanges (DEXes), slippage occurs when the price of a token changes between the time a user submits a swap order and the time the transaction is executed on the blockchain. The primary cause of slippage in DEXes is the fluctuation in token prices due to market forces and the liquidity available in the pools.
How to Manage Slippage Tolerance
To manage slippage, users can set a slippage tolerance, which is the maximum allowable price difference between the expected and executed price. If the slippage exceeds the set tolerance, the transaction will not be executed, preventing excessive losses due to unfavourable price changes.
It is essential to be aware of slippage when trading on DEXes and to set an appropriate slippage tolerance to minimize potential losses or unexpected price changes.
What Slippage Tolerance Setting is Recommended?
There isn’t a universally recommended slippage setting, as the appropriate slippage tolerance depends on several factors, such as market volatility, liquidity of the trading pair, and your personal risk tolerance. However, some general guidelines can help you decide on a suitable slippage tolerance for your trades:
- Low slippage (e.g., 0.1% – 0.5%): This setting is suitable for trading pairs with high liquidity and low volatility, where price fluctuations are minimal. A low slippage tolerance can help minimize potential losses, but it may result in a higher likelihood of failed transactions if the market is volatile.
- Medium slippage (e.g., 1% – 2%): This setting can be used for moderately liquid and volatile trading pairs. It offers a balance between minimizing slippage and ensuring that transactions are executed successfully. This range is often used as a default or starting point for many traders.
- High slippage (e.g., 3% – 5% or higher): This setting is suitable for trading pairs with low liquidity or high volatility, where significant price fluctuations are more likely. A high slippage tolerance increases the likelihood of your transactions being executed but may result in more considerable slippage-related losses.
It’s essential to adjust your slippage tolerance based on the specific trading pair, market conditions, and your risk tolerance. Keep in mind that you may need to modify the slippage setting as market conditions change or when switching between different trading pairs.
What is Unlimited Slippage Tolerance?
Minswap offers the ability to set the swap slippage tolerance to unlimited, allowing users to process orders even in volatile market conditions. However, it’s crucial to exercise caution when utilizing this feature, as it carries the risk of significant price movement between the confirmation and execution of a trade.
Slippage refers to the percentage difference between the expected price of a trade at the time of confirmation and the price at which it is executed on the blockchain. By setting a conservative slippage tolerance percentage, users can ensure their trades remain closer to their expected prices.
Why Allow for Unlimited Slippage?
The reason unlimited slippage is allowed on Minswap is due to the unique characteristics of the Cardano blockchain. Unlike other Ethereum Virtual Machine (EVM) based chains that rely on a gas fee market, Cardano’s transaction fees are deterministic and calculated beforehand. This deterministic fee structure ensures that transactions will always be processed with fair pricing, although they may be queued during times of network congestion. This approach provides a fairer user experience, particularly for those who cannot afford market-priced transaction fees.
By offering unlimited slippage as an alternative, Minswap allows users to potentially avoid high transaction fees associated with market-based fee bidding. Instead, users may experience less favorable swap prices if the market is highly volatile during the time of execution.
It’s important for users to carefully consider their risk tolerance and market conditions when selecting the appropriate slippage tolerance. Utilizing unlimited slippage should be done with caution, as it may lead to unexpected losses if the market experiences significant price movements during the transaction confirmation and execution period.
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