Price slippage

Author

@paulapivat (paul_apivat#3817)

Description

The general definition of slippage is the difference between the expected price of a trade and the price at which the trade is executed [1]. In a traditional order-book market, the term price impact describes what happens when the available liquidity of a prior limit-sell order impacts a subsequent limit-sell order at a higher price, resulting in the executed price being between the two limit-sell prices to which the order was filled [2].

There is a gap between expected price (i.e., price at limit-sell order time 1) vs. executed price (i.e., price between limit-sell order time 1 and time 2).

The price impact in an AMM (automated market maker) context has a slightly different dynamic. While a trade is executed, the relative value of one asset in terms of another continuously shifts to where the final execution price is between where the price started and ended [2].

Moreover, the price impact for a given swap size will also change relative to the amount of liquidity available. Greater liquidity results in lower price impact, for a given swap size.

Transactions submitted to Ethereum offering higher ‘gas’ fees are executed faster. Transactions with lower gas fees take a longer time. During this lag time, the relative value and available liquidity of the assets being traded could change, as other swaps take place.

Slippage tolerance is the acceptable margin of change between price at time the transaction was submitted and pending, to the time the transaction was finally executed.

Price slippage is, conceptually, a combination of price impact and slippage. And involves a combination of relative price, liquidity and gas fees.

References

1. Hayes, Adam (May 10, 2021). Slippage: What It Means in Finance, With Examples. URL: https://www.investopedia.com/terms/s/slippage.asp

2. Uniswap V3 documentation: https://docs.uniswap.org/protocol/concepts/V3-overview/swaps