What is Slippage in Crypto? How Avoid It on PulseChain and PulseX

PulseX will likely have low liquidity in the first few months.

This will result in high volatility and lots of slippage when placing trades.

This article will walk you through everything you need to know about slippage in crypto, including what is it, and how to avoid in on DEXs such as PulseX.

What is Slippage in Crypto?

In the context of cryptocurrency trading, slippage refers to the difference between the expected price of a trade and the actual executed price.

Slippage = Expected Price - Actual Price

What Factors Affect Slippage?

1. Market Order Size: The size of your market order can impact slippage. Larger orders tend to face higher slippage because they require more liquidity to be filled entirely at the desired price. If there is insufficient liquidity at the requested price level, the order may get partially filled at different price levels, resulting in slippage.
2. Market Volatility: Volatility refers to the rapid price fluctuations in the cryptocurrency market. Higher volatility can increase slippage as prices may change quickly between the time you place an order and when it gets executed. During highly volatile periods, the executed price may deviate significantly from the expected price, leading to higher slippage.
3. Order Book Depth: The depth of the order book, which represents the cumulative volume of buy and sell orders at various price levels, can impact slippage. If the order book has limited depth, a large market order can quickly deplete the available liquidity at the desired price, resulting in slippage.
4. Time of Execution: The timing of your trade can influence slippage. Market conditions can vary throughout the day, and certain times may have higher liquidity and lower slippage compared to others. Trading during periods of high market activity and volume may help reduce slippage.
5. Exchange or Trading Platform: Different exchanges and trading platforms can have varying levels of liquidity and order book depth for specific cryptocurrencies. It's possible to experience different levels of slippage when trading the same cryptocurrency on different platforms.

Crypto Slippage Example

Let's say you want to buy 10 PLS tokens at the current market price of $1 per token. You place a market order, expecting to execute the trade at the prevailing market price.

However, due to slippage, the actual executed price may be slightly different from the expected price. In this case, let's assume there is not enough liquidity at the desired price level, and your order gets partially filled at different prices.

The first 5 PLS tokens are executed at $1 per token, which aligns with your expected price. However, due to insufficient available supply, the remaining 5 PLS tokens are filled at a slightly higher price of $1.10 per token.

As a result, the total executed price for the 10 PLS tokens is (5 PLS * $1) + (5 PLS * $1.10) = $5 + $5.50 = $10.50.

Here, the slippage can be calculated by comparing the expected total cost of $10 (10 PLS * $1) with the actual executed cost of $10.50. The slippage in this example would be $10.50 - $10 = $0.50.

This means that due to slippage, you paid an additional $0.50 more than initially anticipated for the purchase of 10 PLS tokens.

Slippage can work both in favor of or against the trader. In this example, it resulted in negative slippage, where the executed price was worse than the expected price. Positive slippage would occur if the executed price was better than expected, resulting in a more favorable trade.

What is Slippage Tolerance in Crypto?

Slippage tolerance refers to the acceptable deviation or difference between the expected price of a trade and the actual executed price.

Slippage tolerance is the predefined limit or range within which a trader or investor is willing to accept slippage. It represents the maximum acceptable deviation from the expected price. Traders typically set a slippage tolerance to manage the potential impact of price discrepancies during the execution of their trades.

For example, if a trader sets a slippage tolerance of 1%, it means they are willing to accept a deviation of up to 1% from the desired execution price. If the slippage exceeds this tolerance level, the trader may need to reevaluate their trading strategy, adjust their order parameters, or consider alternative execution methods to minimize the impact of slippage.

How To Change Slippage Tolerance

The ability to change slippage tolerance depends on the specific trading platform or software you are using. Here are general steps that may help you adjust the slippage tolerance:

1. Access your trading platform: Log in to your trading account and navigate to the platform or software you use for placing trades.
2. Locate order settings: Look for the section or menu that allows you to modify order parameters. This section is usually related to order types or trade settings.
3. Find slippage tolerance: Within the order settings, search for the option that pertains to slippage tolerance. It may be labeled as "slippage tolerance," "maximum deviation," or something similar.
4. Adjust the slippage tolerance: Once you have located the slippage tolerance option, you can modify it according to your preference. Depending on the platform, you may need to enter the value as a percentage or in terms of pips or points.
5. Save or apply changes: After adjusting the slippage tolerance value, save the changes or apply them to ensure they take effect for future trades.

How to Minimize Slippage Fees

There are many different ways to minimize slippage:

Use limit orders

Limit orders guarantee 0% slippage. Consider using a DEX Aggregator such as Matcha.xyz or CowSwap.

PulseX will also have limit order capability on PulseChain.

Switch Platforms

Slippage depends on the size of liquidity pools. If you try another DEX instead, you’ll find other pools with hopefully lower slippage.

You can find liquid DEXs on explorers like DeFiLlama or DappRadar.

Split your orders

If you want to swap $10,000 but there’s only $5,000 of liquidity, find another DEX with $5,000 or more. Splitting orders among DEXs can save over 10% in price impact. For large amounts, they’re worth the extra network fees.

Use more gas

On Ethereum Mainnet, validators prioritize orders with high network fees. If you’re willing to pay more gas, your order can execute at the expected price before liquidity runs out. You pay lower slip than it shows.

Reduce Slippage Tolerance

If slippage is too expensive, you can try below 0.5%. For smaller coins, you have to decide if it’s worth the risk of failing the transaction and paying network fees. You can set a maximum deadline of 72h on most DEXs to prevent failed orders.

The Bottom Line

You don't want to be the whale who executes orders like a noob.

Slippage in crypto is one such technical issue to understand if you want to execute smart orders.