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What is Uniswap Slippage?


Slippage is an issue that traders constantly mention, especially those that use Decentralized-Exchanges (DEXes) like Uniswap. The concept is not hard to understand, but it is still incredibly difficult to manage it. But what exactly is it and is there any way for you to change it?

In this article, we will help you with both questions and show you why DEXes have higher slippage as well.

On a Centralized-Exchange (CEX), you can create a limit order that will execute a trade at a specific price.

For example, you can create an order that buys Bitcoin at $12,000 and it will be recorded in the order book. However, just because you informed the exchange that you want to buy at a specific price does not mean that the trade will be executed exactly in that way. In reality, most trades are executed slightly below or above a certain price point. But why does that happen?

If order books are thin, then there will not be enough sellers for BTC at $12,000. Therefore, the exchange will execute your order at the next best price. Based on this, we can conclude that slippage is effectively the difference between the expected and executed price of a trade. 

But we know that DEXes like Uniswap do not have order books, so do they experience slippage? As you may already know, a smart contract called an Automatic Market Maker (AMM) executes trades on Uniswap.

However, the common laws of trading still apply to this case as well. With high enough volatility levels and large volume orders, one will still experience high price slippage, even on Uniswap.

The question is, how do you minimize these adverse effects?

Minimizing Slippage on Uniswap

Slippage is something that can be directly controlled with the aid of Uniswap.

The best way to ensure low price differences for executed trades is to make a token swap when volatility is extremely low.

However, that will not always be the case. Traders make the most money under high volatility, so why miss out?

To help all traders on its platform, Uniswap introduced Slippage Tolerance.

Effectively, this enables you to set how many tokens you would wish to receive under a certain price. If you do not wish to make a trade where the amount of tokens received is under a certain threshold, you can set a slippage tolerance that fits your requirements. 

What you are doing on Uniswap is setting the minimum number of tokens you are willing to lose comprised in fees.

For example, you can set the slippage tolerance at 5% and the maximum difference of received tokens will be at 5%. 

Let’s say that we want to buy 50 LINK.

With a 5% slippage tolerance, we ensure that the lowest number of tokens we can receive is 47.5. It is impossible to receive fewer tokens than that and it is highly useful when creating large volume orders.

Uniswap allows you to set a slippage tolerance at preset levels such as 0.1%, 0.5%, and 1%. However, you can also set a custom amount to almost any reasonable number.

Be especially mindful when changing the default setting to the desired percentage as a typo can lead to disastrous outcomes.

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