Overview

Cryptocurrency exchanges have become an essential part of the cryptocurrency ecosystem. They provide users with a platform to buy, sell, and trade digital assets. However, like any financial institution, cryptocurrency exchanges are not immune to slippages. This is due to several factors, such as volatility, liquidity, order size, and trading fees. In this blog post, we will explore these factors in more detail and provide some tips on how to minimize slippage when trading cryptocurrencies

What is a Slippage?

Cryptocurrency slippage is a term used to describe the difference between the expected price of a cryptocurrency trade and the price at which the trade is executed. Some factors that affect slippage are

Volatility

One of the main factors that contribute to cryptocurrency slippage is market volatility. Cryptocurrencies are notoriously volatile, and sudden price movements can occur at any time. If a trader places a market order during a period of high volatility, the order may be executed at a price that is significantly different from the expected price, resulting in slippage.

Liquidity

Another factor that can contribute to slippage is liquidity. Cryptocurrency exchanges with low liquidity may not have enough buyers or sellers to execute trades at the desired price. As a result, the price may move away from the expected price, resulting in slippage.

Order Size

The size of an order can also play a role in slippage. Large orders can move the market and cause the price of the asset to fluctuate. If a trader places a large buy or sell order, the price of the asset may move away from the desired entry or exit point, resulting in slippage.

Trading Fees

Cryptocurrency exchanges often charge trading fees, which can also contribute to slippage. These fees can eat into a trader's profits, especially for smaller trades. It's important to factor in trading fees when calculating expected profits or losses and to choose an exchange with competitive fees.

Now to show how this might work in solidity

function calculateMaxPriceDifference(uint expectedPrice, uint slippageTolerance) public pure returns (uint) {
    uint maxPriceDifference = (expectedPrice * slippageTolerance) / 100;
    return maxPriceDifference;
}

In this example, the expected price is passed as a uint (unsigned integer) and the slippage tolerance is passed as a percentage. The function then calculates the maximum acceptable price difference using the formula above and returns the result as a uint.

Using Slippage Tolerance in Solidity Once we have implemented slippage tolerance in Solidity, we can use it to ensure that trades are executed at the desired price. For example, let's say a trader wants to buy 1 ETH for 6000 USDT with a slippage tolerance of 1%. They can use the calculateMaxPriceDifference function to determine the maximum acceptable price difference:

uint maxPriceDifference = calculateMaxPriceDifference(6000, 1);

In this example, the maximum acceptable price difference is 60 USDT. The trader can then place a buy order for 1 ETH with a maximum price of 6060 USDT to ensure that the trade is executed within the specified slippage tolerance.

Conclusion

Implementing slippage tolerance in Solidity is a crucial step in ensuring that trades are executed at the desired price in DeFi protocols. By using the formula to calculate the maximum acceptable price difference, traders can specify their slippage tolerance and reduce their risk of unexpected losses due to slippage.