We’ve all seen it happen.
You put in an order to make a trade. You want to buy a certain crypto, one you think will make you a good profit either in the short term if you’re a trader, or in the long term if you’re an investor. However, when you go to buy 4 coins with $100, the trade goes through and suddenly you see you don’t have 4 coins, you have 3.5, but you’ve still paid the $100.
This difference of what you expected to receive vs what you actually received is called slippage. Slippage occurs when there is low liquidity in a crypto or stock pool.
Let’s say you have 2 of CoinA, which is currently valued at $700. You want to use your 2 of CoinA to buy 5 of CoinB (this is called trading or swapping), because these two have the same value of $700. However, CoinB looks like it’s going to be increasing in value, which is why you want to trade your CoinA for it.
When you go in to review your trade, it tells you to expect to receive $700 worth of CoinB, which is 5 tokens, in exchange for your 2 CoinA.
However, there is a change in the price of CoinB between the placing of the order and the time the order was executed. Suddenly, it no longer costs $700 to get 5 CoinA. It costs $800. But you don’t know this until after the trade has gone through, and you’re technically buying $700 or 2 CoinA’s worth of CoinB, not 5 of CoinB. (This extreme change in the mere moments it takes to complete an order is incredibly unlikely, and only used for the sake of this example)
When you see the final executed trade, you realize you have only bought 4.375 of CoinB. This difference is what’s called “slippage”.
Simply put, slippage is the difference between an expected trade and the executed trade.
There is not a difference because of any dishonesty or a lag in the technology. Slippage is the difference between the expected, agreed to price of a trade and the executed trade. It is evident through either a loss or gain the user experiences in a trade due to market liquidity and high volatility. It can occur at any time, but is especially important to be aware of when a large order is placed but there isn't enough liquidity (available coins) to fulfill the trade at the user's current asking price. It’s usually a minor change, to the tune of a few cents, but it depends on the liquidity and the volatility of the market. Slippage can occur in any market, not just crypto.
Slippage does not always result negatively. It can “slip” in a direction that actually benefits the one placing the order.
The severity of slippage is not always significant enough to bat an eye at for most people, but depending on the liquidity and the volatility of the market, it can be alarming. Luckily, many exchanges have some form of slippage protection in place, whether it be a warning as you’re about to place an order, setting a slippage limit, or allowing their users to place a slippage limit. If the expected slippage exceeds the limit, it won’t go through.
At Digifox, we protect our users against slippage with a 3% slippage limit, which we might occasionally alter depending on the market and what our users want. In the (near) future, we will give our users the ability to set their own slippage limits and therefore give them the tools they will need to further take control of their financial future.