Crypto Slippage Explained & 6 Proven Ways to Reduce it
Crypto slippage is when the price you expect for a trade doesn’t match the price you actually get. This usually happens in volatile markets or with low liquidity. To avoid slippage in crypto, stick to high-liquidity pairs, use limit orders, or adjust slippage tolerance settings, along with other strategies we’ll discuss today.
Slippage in crypto can be a real headache, especially with volatile markets or coins like memecoins. While it’s usually around 0.5-1%, it can jump to 3-5% or more in some cases. New traders often find it tricky to understand why slippage happens and how to avoid it.
This guide breaks down what slippage is, why it occurs, and simple ways to reduce it.
What is Slippage in Cryptocurrency?
Crypto slippage happens when the price you expect for a trade isn’t the price you actually get. It’s common in fast-moving markets or when trading tokens with low liquidity. Slippage can work in your favor (positive slippage) or against you (negative slippage).
On centralized exchanges (CEXs) like Binance, trades happen using an order book. Buyers and sellers set their prices, and trades match accordingly. If your trade is large or the order book doesn’t have enough matching orders, parts of your trade may go through at higher or lower prices, causing slippage.
Decentralized exchanges (DEXs) like Uniswap work differently. They use liquidity pools instead of order books. Here, prices change based on the pool’s balance. If you trade a large amount or the pool is small, you might face significant slippage.
For example, trading 10 ETH for USDC on a DEX with low liquidity could give you less USDC than expected. Similarly, placing a market order for 5 BTC on a CEX during high volatility could result in parts of your trade being filled at higher prices.
Why Does Slippage Happen?
Crypto slippage happens because of market volatility, low liquidity, and transaction delays. Let’s break down how each factor contributes to slippage. Understanding these causes will help you better implement trading strategies that reduce slippage.
Market Volatility
This one is straightforward. In a volatile market, prices change rapidly, moving up and down in short periods. These quick price changes between placing and executing an order often cause slippage.
For example, when Tesla announced its Bitcoin investment in early 2021, the market became highly volatile, leading to significant slippage for traders. Similarly, events like Federal Reserve rate decisions or major crypto updates, such as the Ethereum merge, can trigger rapid price swings, increasing the chances of slippage.
Liquidity Pools and Slippage
On decentralized exchanges (DEXs) and in liquidity pools, low liquidity means there aren’t enough tokens available at the price a trader wants.
For example, if you’re trading 20 ETH for USDC on Uniswap and the pool has low liquidity, there may not be enough USDC to complete your trade at the expected price. The automated market maker (AMM) formula (e.g., x * y = k) adjusts the price, increasing the cost per token. As a result, you could receive fewer USDC than anticipated.
Similarly, a trader exchanging 100 ETH for DAI on PancakeSwap might face a noticeable price impact due to the large trade size. If this sounds confusing, don’t worry—understanding how AMMs work can help. Check out our in-depth guide on AMMs and their role in powering DeFi.
Also, check out UniSwap vs PancakeSwap vs SushiSwap to understand how each of these specific platforms works.
Transaction Delays
Delays in block confirmation times can lead to price differences between when you place a trade and when it’s executed. Block confirmation time refers to how long it takes for a transaction to be added to the blockchain. During this time, market conditions can change, especially in volatile markets.
For example, a trader trying to buy 1 ETH for $1,500 during a busy period on the Ethereum network might face delays due to congestion. By the time the transaction is confirmed, the price of ETH could rise to $1,520. This happens because transactions are processed in blocks, and delays leave the trade vulnerable to price fluctuations.
On a side note, these situations highlight the importance of transaction speed and choosing blockchains with faster processing times, like Binance Smart Chain, to reduce crypto slippages.
Trading Strategies for Slippage: How to Reduce Slippage
Here are some trading strategies that help you reduce slippage in crypto:
Use Limit Orders vs. Market Orders
Limit orders help you avoid unexpected slippage by executing trades only at a specific price or better. You set a maximum price for buying or a minimum price for selling. For instance, if you want to buy 1 ETH and place a limit order at $1,500, the trade will only go through if the price is $1,500 or less.
This strategy protects you from unfavorable price changes, but it might delay your trade if the market doesn’t hit your set price. In a market as volatile as crypto, using limit orders becomes almost a necessity to reduce slippages and other losses while trading.
Adjust Slippage Tolerance Settings
Most trading platforms let users set slippage tolerance, expressed as a percentage. This controls how much price movement you’re willing to accept before a trade fails. For example, if you set a 1% slippage tolerance on a $1,000 trade, the transaction won’t go through if the price moves by more than $10. Lower tolerance protects you from big losses but might cause transaction failures during rapid price swings.
Higher slippage tolerance increases the chances of your trade being executed, but exposes you to risks like frontrunning. Frontrunning in DeFi happens when bots or individuals detect pending transactions on the blockchain and place their own trades ahead of yours to manipulate the price.
Here’s a simplified example: You set a 5% slippage tolerance to buy a token on Uniswap during a volatile period. A frontrunning bot sees your transaction in the mempool (pending transactions) and places a buy order first. This drives the token price up just below your slippage limit (e.g., 4.9%), making you pay more. Once your trade is processed at a higher price, the bot quickly sells the token for a profit.
Frontrunning attackers in DeFi profit by exploiting tolerance slippage settings and market timing to generate risk-free gains. To avoid this, use smaller trade sizes, adjust slippage tolerance settings carefully, and trade in pools with higher liquidity.
Trade in High-Liquidity Pools or Use DEX Aggregators
High liquidity helps prevent large orders from significantly affecting token prices. For example, trading a popular pair like ETH/USDT on a centralized exchange like Binance usually results in minimal slippage because of its deep order books.
On decentralized exchanges, using high-liquidity pools—like those on Curve Finance—also reduces the risk of price distortion. These pools are designed to handle large trades efficiently.
Another option is to use DEX aggregators. Tools like 1inch and Paraswap pull liquidity from multiple sources to optimize trade execution. For instance, if you want to swap ETH for DAI, an aggregator might split your order across several liquidity pools. By sourcing liquidity intelligently, these aggregators help traders get better prices and reduce transaction costs.
Leverage Layer-2 Solutions
Layer 2 solutions are like extra lanes added to a busy highway. They take most of the traffic off the main blockchain (like Ethereum) to speed things up and lower costs while maintaining security. Platforms like Arbitrum and Optimism handle transactions off-chain and only send the essential data back to Ethereum for final confirmation, making everything faster and cheaper.
For example, if you trade on Uniswap using Arbitrum, your transaction gets done quicker and with lower fees compared to using Ethereum directly. This helps reduce delays and slippage, especially during market swings. Layer 2 platforms are great for smaller trades where high fees and slow execution on Ethereum can be a problem.
You can also check out our guide on reducing Ethereum gas fees.
Avoid High-Volatility Periods
Trading during big events like major announcements or earnings releases often leads to sudden price spikes and higher slippage. For example, Bitcoin’s halving events usually cause erratic price swings. Similarly, after recent election results, the crypto market saw extreme volatility, even though it was on a strong upward trend.
If your main goal is to avoid slippage, it’s better to avoid trading during these periods. But realistically, that’s not always practical, especially for day traders. They tend to trade in volatile markets because that’s where the biggest opportunities (and risks) are. Slippage is just part of the game in those situations.
Break Up Large Trades
If you’re not placing huge orders, which most crypto day traders aren’t, you can reduce slippage by splitting big trades into smaller ones. Here’s how it works: Instead of buying $100,000 worth of ETH in one go, break it into $10,000 chunks. This spreads out the impact on the market and helps keep prices more stable.
Yes, you might pay a bit more in transaction fees, but it’s a good trade-off to avoid major slippage and handle price swings better.
Trading Bots
Trading bots like 3Commas and Cryptohopper let you automate trades with preset strategies. For example, you can set a bot to automatically place stop-loss and take-profit orders for a pair like BTC/ETH, so trades happen fast as prices change.
Check out our list of the best crypto trading bots for more.
They save you from constantly watching the market and can help improve execution. But they’re not foolproof. You need to set them up carefully, monitor them, and pay subscription fees (or build your own bot). In volatile markets, if settings aren’t fine-tuned, bots might still execute bad trades. To get the most out of them, proper setup and regular checks are a must.
FAQ
Why does slippage happen in DEX?
Slippage happens in decentralized exchanges (DEXs) because they use liquidity pools and automated market makers (AMMs) instead of order books. If a pool doesn’t have enough tokens or your trade is too big, the price shifts to balance the pool. This can cause slippage. Fast price changes during volatile markets make it even worse.
How to calculate slippage in crypto?
To calculate slippage:
- Subtract the expected price from the actual price.
- Divide the difference by the expected price.
- Multiply by 100 for the percentage.
For example, if you expected $1,000 but paid $1,010:
Slippage = ((1,010 – 1,000) / 1,000) × 100 = 1%
Knowing this helps you plan trades better. You can also use a slippage calculator like this to estimate potential costs and adjust your strategy.
How much slippage is normal in crypto?
Slippage depends on the type of coin:
- Stablecoins (e.g., USDT, USDC): Usually under 0.5% because they’re stable and highly traded.
- Blue-chip coins (e.g., BTC, ETH): Around 0.5% to 1% due to high liquidity.
- Meme coins or small tokens: Often 3-5% or more because of low liquidity and big price swings.