What is Slippage in Swaps?

Understanding Slippage in Token Swap

Slippage in token swaps is the difference between the expected price of a trade and the actual price at which the trade is executed. This can happen due to various reasons, including market volatility, low liquidity, and the size of the trade compared to the market's capacity. Here are the key points about slippage in token swaps:

1. Market Volatility. In a highly volatile market, prices can change rapidly in a short time. For example, if you place a trade to buy a token at a certain price, but the price rises before the trade completes, you end up buying at a higher price than expected.
2. Liquidity. In markets with low liquidity, there may not be enough buy or sell orders at the expected price, causing the trade to execute at a less favorable price. This is often seen with smaller or less popular tokens.
3. Trade Size. Large trades can move the market price, especially in low liquidity markets. A large buy order might exhaust the sell orders at the current price, forcing the trade to spill over to higher prices.
4. Automated. Market Makers (AMMs): On decentralized exchanges (DEXs) using AMMs like Uniswap, slippage occurs because the token prices change based on the token ratio in the liquidity pool. Large trades can significantly impact this ratio, leading to slippage.
5. Slippage Tolerance. Traders can set a slippage tolerance, which is the maximum acceptable price deviation from the expected price. If the slippage exceeds this tolerance, the trade will not be executed. This helps manage risk, although it may result in the trade not being completed.

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The default slippage tolerance is set to 0.5% in Keplr Extension and Dashboard. In Keplr Extension, you can adjust it manually by clicking on the gear iconin the top right corner of the Swap page. However, please note that adjusting slippage can limit output price variation, but increases the chance of a swap failing.