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Slippage on ElectroSwap

When trading tokens on ElectroSwap, you might come across an option to adjust "slippage tolerance." Slippage refers to the difference between the expected price of a trade and the actual price at which it executes. Keep reading to get a better understanding of how slippage works and when you may need to adjust it manually which can help you navigate volatile markets and ensure your trades go through as intended.

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ElectroSwap provides sensible defaults for slippage tolerances, and automatically adjusts slippage for Fee-on-Transfer tokens

What Is Slippage?​

In the context of decentralized exchanges like ElectroSwap, slippage is the percentage difference between the price you expect to pay (or receive) for a token and the final price at which the transaction is executed. Slippage can occur for several reasons, such as:

  1. Market Volatility: Rapid price movements cause prices to change quickly, increasing the likelihood of executing a trade at a different rate than expected.
  2. Low Liquidity: With less liquidity in a token’s pool, a single trade can have a more significant impact on price, leading to higher slippage.
  3. Network Delays: Transactions take time to process, and in that interval, the token’s price might change due to other market activities.

Slippage is expressed as a percentage of the token's value, and on ElectroSwap, users can set their tolerance level for slippage. For example, setting a slippage tolerance of 1% means you’re willing to accept a price difference of up to 1% from your initial expectation.

Why Slippage Is Necessary​

ElectroSwap is a decentralized, automated market maker (AMM), meaning prices are constantly adjusting based on the demand and supply in each pool. If a price changes before your transaction is processed, you have two options:

  • Accept the slippage: Your transaction will complete, albeit at a slightly different price.
  • Reject the slippage: If the slippage exceeds your set tolerance, the transaction fails, preventing you from buying at a higher price or selling at a lower one.

For most transactions, ElectroSwap defaults to automatic slippage adjustment, calculating the optimal slippage tolerance based on current market conditions. However, in volatile conditions, you may still need to adjust slippage tolerance manually to ensure your trades go through without failing.

When to Adjust Slippage Tolerance​

  1. High Volatility Periods

    • During periods of extreme market volatility, token prices can swing quickly. If you’re trading tokens during these times, you might need to increase your slippage tolerance to prevent failed transactions due to rapid price shifts.
    • Example: In a volatile market, setting a 1% slippage tolerance may cause your transaction to fail repeatedly, whereas increasing to 3-5% may allow your trade to complete even if prices fluctuate.

  2. Low Liquidity Pools

    • Pools with low liquidity (often for newer or lesser-known tokens) are more susceptible to large price movements from individual trades. Adjusting your slippage tolerance may be necessary to execute a trade without interruptions in such pools.
    • Example: A small token pool with limited liquidity may experience price shifts from a single transaction, so you may need to increase slippage tolerance slightly to ensure the trade succeeds.

  3. High-Value Transactions

    • When conducting large trades, your transaction is more likely to impact the token price, as your swap could use a significant portion of the liquidity in the pool. Increasing slippage tolerance can prevent the transaction from failing due to the price changes caused by the trade itself.
    • Example: When swapping $10,000 worth of a token in a relatively small pool, the trade might significantly impact the token’s price, necessitating higher slippage tolerance.

How to Adjust Slippage on ElectroSwap​

Although ElectroSwap defaults to automatic slippage adjustment, you can manually set your slippage tolerance if you encounter repeated transaction failures or are trading in a high-volatility environment.

Steps to Adjust Slippage Tolerance:​

  1. Initiate a Trade: Enter the amount and tokens you want to swap.
  2. Open Settings: In the swap interface, click the settings icon (⚙️) typically found in the upper right corner.
  3. Adjust Slippage Tolerance: You’ll see options for different tolerance levels (e.g., 0.1%, 0.5%, 1%), and an option to enter a custom percentage. Choose a tolerance that suits the market conditions.
  4. Complete the Trade: After setting your slippage tolerance, proceed with the trade. If the price fluctuates within your set tolerance, the transaction will execute; otherwise, it will fail.

Risks of High Slippage Tolerance​

While higher slippage tolerance can prevent transaction failures, it also exposes you to greater price changes, meaning you could end up paying significantly more (or receiving less) than expected. Here are some considerations when increasing slippage tolerance:

  • Front-Running Risk: Bots may detect trades with high slippage tolerance and front-run the transaction, potentially increasing the cost of your swap.
  • Price Discrepancy: A higher tolerance allows a wider range of prices, potentially causing you to buy at a higher rate or sell at a lower one than you’d anticipated.
tip

Only increase slippage when necessary, and set a limit that matches the level of volatility or liquidity of the token pair you’re trading.

Frequently Asked Questions​

1. How much slippage tolerance should I set in volatile markets?

  • There’s no universal rule, but starting with 2-5% during high volatility is a good approach. Adjust further based on how frequently your transactions succeed or fail.

2. Will ElectroSwap's default slippage be enough for most transactions?

  • Generally, yes. ElectroSwap’s automatic slippage calculation often suffices, but during extreme volatility or in low-liquidity pools, manual adjustment may be beneficial.

3. Can high slippage lead to losing funds?

  • Indirectly, yes. A higher slippage tolerance can result in a worse exchange rate, meaning you may receive fewer tokens than expected or pay more than planned. This isn’t a loss of funds per se but a cost from accepting less favorable terms.

Conclusion​

Slippage is an inherent aspect of decentralized trading, balancing between trade completion and price accuracy. While ElectroSwap’s automatic slippage adjustment handles most scenarios effectively, adjusting it manually in volatile or low-liquidity environments can prevent failed transactions. By understanding how slippage works, when to adjust it, and the risks involved, you can make more informed trading decisions on ElectroSwap.