What is a Slippage?
In cryptocurrency, slippage is the difference between the price you set for an order and the price at which the order actually executes. Slippage is usually expressed as a percentage, for example, 0.5%, 1%, or 10%. Decentralized exchanges, such as Uniswap and PancakeSwap, usually require users to input a slippage value before trading.
Slippage can be viewed as your tolerance for price fluctuation. In other words, how much price increase/decrease you are willing to accept when buying/selling. For example, if you buy a token with a slippage of 10%, this means that your orders can be filled at a price within that percentage range. If the token price exceeds your slippage tolerance while the order is in progress, your order will not be executed.
A Deeper Look at Slippage
One of the most common misconceptions about slippage is that your order will only be executed at your slippage price. However, it is important to remember that slippage is merely a tolerance level. So, even if you set your slippage value to 50%, it does not necessarily mean that your order will be executed at 50% above the market price. Rather, it means that you are willing to accept a 50% fluctuation, should that fluctuation happen while the order is in progress.
Specifying slippage has become necessary due to the volatile nature of the cryptocurrency market. This parameter is especially critical during token launches, where buying activity can cause the coin price to rise quickly within the first minutes of launch.
If your slippage is set too low, then the price of the coin may exceed your tolerance by the time your order goes through, resulting in a failed transaction. It is, therefore, necessary to set higher slippages during launches to ensure that your transaction is successful. However, you should note that setting a slippage too high can make you a victim of frontrunning.
On the other hand, where a coin or token has high liquidity, lower slippages can be used since the price volatility is not as extreme.
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