The gap between expected and actual
Slippage is the difference between the price you expected when you decided to trade and the average price at which the trade actually executed. It can work against you, and occasionally in your favour, though the unfavourable kind is the one people usually worry about.
It arises because the price you see is only the price for the very first unit. A larger order has to be filled by many counterparties at progressively less attractive prices, and the market can also move between your click and your fill.
Where it comes from
There are two main sources.
Size against available liquidity. A buy order that is bigger than the quantity at the best ask must continue to higher asks. A sell order bigger than the best bid continues to lower bids. The thinner the market, the faster the price deteriorates. The article on liquidity and market depth explains why some markets are shallower than others.
Movement during execution. Prices keep changing. If the market moves up while your buy order is travelling to the exchange or waiting on a slow network, you fill at the new, higher price. This is more likely in fast-moving conditions, when price volatility is high.
On decentralized platforms using pools, the first source operates through the pricing formula: each unit you take shifts the pool’s balances and therefore its price. The article on automated market makers shows a worked example. The second source can also arise from the time it takes for a blockchain transaction to be confirmed, with gas fees and congestion affecting how quickly that happens.
Measuring it
A simple measure compares the average execution price to a reference price, usually the best price or the midpoint before the order.
For a buy:
slippage % = (average fill price - reference price) / reference price * 100
For a sell, the sign is reversed, so a lower fill price counts as adverse.
Take an illustration with made-up numbers. The best ask is 100, and the book holds 2 coins at 100, 3 coins at 101 and 5 coins at 103. You buy 6 coins.
- Cost: 2 * 100 + 3 * 101 + 1 * 103 = 200 + 303 + 103 = 606
- Average fill: 606 / 6 = 101.00
- Slippage: (101.00 - 100) / 100 = 1.00%
In finer terms, traders often use basis points, where one basis point is 0.01%. So 1.00% equals 100 basis points.
Measured against a midpoint instead, the result is slightly different, since the midpoint sits between the bid and ask. When you compare numbers from different sources, check which reference they use. Part of what looks like slippage may simply be the bid-ask spread you paid to trade immediately.
What makes it larger
- Larger order size relative to the visible depth
- Thin markets, small pools and less popular tokens
- Fast, news-driven or panic-driven price moves
- Market orders and swaps that accept any price
- Slow execution, including congested networks
- Stressful periods when quoters withdraw, such as a liquidation cascade
Slippage tolerance on decentralized platforms
Swap interfaces usually include a setting for slippage tolerance, a maximum percentage by which the executed price may differ from the quoted one. If the price moves beyond that limit before the transaction confirms, the swap fails instead of completing.
Setting it involves a trade-off. A very tight limit may cause repeated failed transactions, each of which can still cost a network fee. A very loose limit leaves you open to a poor price, including from other participants who place trades around yours when they see your pending transaction. There is no setting that is right for every case, and some tokens with unusual built-in rules need special handling, so it is wise to understand what you are trading.
Ways people try to limit it
None of these removes the cost, and each has its own downside.
- Limit orders set the worst price you will accept, but they might not fill. See the article on market orders and limit orders.
- Splitting a large order into smaller pieces over time can reduce the immediate impact, but the market may drift while you wait.
- Choosing deeper venues or pairs often reduces impact, although you should compare fees as well.
- Checking the book or pool first shows roughly how far a given size would move the price.
- Avoiding trades in the most turbulent moments is common advice, but turbulence is also when many people feel most pressure to act.
Common misunderstandings
- Slippage is not a fee charged by the exchange. It is a consequence of how the market fills your order, though fees are an additional cost.
- A “zero slippage” claim should be read carefully. A small order in a deep market may see negligible slippage, but that is a property of the market, not a promise.
- Negative slippage does not mean you did something wrong; sometimes the market simply moved.
Cryptocurrency prices are volatile and you can lose some or all of the money you trade. This article is general education and not financial, tax or legal advice.