If you’re actively trading in Decentralized Exchanges (DEX) like PancakeSwap, UniSwap, ApeSwap, or even trading with tools like PooCoin and Bogged – you will come across the ‘Slippage’ setting as a vital part of your trading. Depending on your level of intellect, you might have already figured out that it has nothing to do with how slippery the floor is. To most rookies and even average traders, this seems like some complex mathematical formula that you need to figure out in order for your trade to get approved. But it’s a lot simpler than you might think. So, what is slippage?
Slippage information has become a common part of conversations where discussing tokens. It is frequently alternated with terms like ‘tax’, ‘slip,’ and ‘tolerance.’ It is crucial information that you need to know otherwise it can cost you unnecessary losses, and depending on the size of your transactions, this can be in the hundreds or even thousands! In this Degen Clinic piece we discuss the rocket science behind Slippage. Keep in mind that this applies to most DEXs regardless of the chain – whether on BSC, ETH, or even KCC.
The Volatility
You must first understand one thing. We are not trading cryptocurrencies on exchanges like Binance, Coinbase, or Indodax. If you started trading on markets like those and somehow found your way into the back alleys or BSC and ERC tokens, you will find it confusing and somewhat weird.
When you trade on major exchanges, you don’t necessarily worry about Slippage %. All you consider is your limit orders, market orders and the exchange fees. You could care less about Liquidity pools, buy / sell taxes, and whether the Dev has a thick accent or not. However, as you immerse yourself in DeFi and alternative shitcoins and memecoins, you will understand the basics of why certain things are the way they are.
It is a well-known fact that cryptocurrency assets are volatile (in comparison to stocks and Forex.) Well, in DeFi, the volatility is exponentially higher. When you attempt to swap on a DEX, the token price can sometimes fluctuate way too much for you to get a successful transaction through.
What is Slippage Tolerance
Let’s say your you set your slippage to 1%. This means that you and your transaction will tolerate a 1% fluctuation in the price. If it fluctuates more than that percentage, your transaction will be declined or rejected – yes, even if the fluctuation benefits you.
Simply put, and basically the summary of this entire article, slippage is how much fluctuation you are willing to risk / tolerate for your transaction. Typically many tokens, specifically those that are still relatively young, will require a high slippage tolerance at around 11-15% on both buy and sell transactions. Currently, with trending DeFi projects that feature Rewards, Buy-Backs, and other tokenomics, will have higher tax which will result in requiring even higher slippage at 18-25% and sometimes even higher at 30% and above.
Types of Slippages
Generally speaking there are two types of Slippages
- Positive Slippage
- Negative Slippage
Positive Slippage is when you attempt to a buy a token and the transaction gets approved for a lower price. It basically means you’ve received your tokens for cheaper than what you intended.
Negative Slippage is when you attempt to buy a token and your transaction gets a approved for a higher price. So you’ve received your tokens at slightly higher rate than what you expected. This is the most common type of slippage experience with most traders who try to buy new tokens (especially on a launch.)
The same Positive & Negative slippages apply to sell transactions – but reversed.
Positive Slippage when it comes to sell transactions is when you’ve received a higher amount ETH or BNB than the calculation you expected. This basically means that during your sell transaction process, the price value increased. Good for you!
Negative Slippage when it comes to sell transactions is when you received a lower amount of ETH or BNB than you expected. This is because the token value has decreased during the process of your transaction. Yes, this happens a lot!
Understanding Slippage & Tax
Taxes are sometimes confused with Slippage and vice versa. You will come across many DeFi projects that break down their tokenomics, explaining the different allocation percentage for each buy and sell transaction. Let’s use EverRise as an example (not affiliated, by the way.)
According to their website, 2% is allocated to rewards to holders, 3% for sustainability (marketing and operations) and 6% towards the Buy-Back mechanism. If you passed 2nd grade mathematics, you will calculate that there’s a 11% tax (2+3+6) on all transactions with EverRise. This means that you will need to set your slippage to 11% at the very least, to cover your transaction tax. Anything lower than this will most likely result in a failed transaction.
To get a successful transaction on a token with taxes, you will need to set your slippage to an amount that’s a little higher than the taxes in order to tolerate any price fluctuation.
Where do I adjust slippage %?
On DEXs like PancakeSwap and UniSwap, this should be easy to find. But if you’re reading this and you’re quite new, here’s where to find the setting (on PancakeSwap as an exmaple.)
Referencing the image above, once you’ve landed on the PancakeSwap home page, located the sidebar on the left hand side of the page and click Trade. This should give you a dropdown menu with 3 options: Exchange, Liquidity, and LP Migration. For now, ignore the rest (we’ll discuss that in another article,) click Exchange. You should be able to see a screen similar to the image above. If not, you can visit it directly here.
In the Exchange Panel, locate the gear icon – commonly used to indicated Settings. Go ahead and click that which should bring you to the popup panel similar to the image below.
Congratulations, you have found the spot where you can adjust your Slippage Tolerance. PancakeSwap provides you with 3 default options at 0.1%, 0.5%, and 1.0%. Assuming you are trading newer shitcoins, memecoins, or pretty much coin that’s quite new, you will need the 4th option which is a custom field. In here you will be able to enter any amount of slippage (up to a maximum of 49.999%.) You will find similar settings across most DEXs like UniSwap and others.
What is Minimum Received?’
Just as you’re about to approve your swap, you might spot the little fine text at the bottom of the Exchange panel that says “Minimum Received.” You be thinking, “Hold up chief, this ain’t profits.” Well there you go, welcome to slippage.
Minimum Received basically informs you of your very minimum result after your slippage has been tolerated and your transaction gets approved. In terms of mathematics in the scenario above, I will receive a minimum of 10% less than what the current rate is.
Calculating profits after slippage
A lot of beginner traders lose profits because they don’t understand the concept of slippage and how to calculate their profits from it. Here’s a simple, dumbed-down way of putting it:
Let’s continue using EverRise as an example.
There’s an 11% tax on all buy and sell transactions.
This means that when you buy you will pay 11% tax and when you sell there will be another 11% tax.
Therefore, you will need a minimum of 22% profits (or Initial investment x 1.22) to be able to break even. (By the way this does not take into account any major fluctuation in the price which would require high slippage.)
Anything above that number is your actual profits regardless of what your DEX or Trust Wallet balance tells you.
The same applies if you sell your tokens. Should you choose to process your transaction without achieving that 22% gain, you will be selling at a loss. In summary, you need to make to make back the taxes in your profits.
Here’s another example:
Let’s say you buy 1 BNB worth of ABC tokens which has a tax and slippage tolerance of 10% on all transactions.
You swap, and you notice your token balance is currently worth 0.9 BNB. (You paid the 10% on the buy transaction.)
In order for you to break even, you will need the worth of your token balance to increase to 1.1 BNB. This is because when you try to sell, you will lose another 10% on your sell transaction – leaving you with your initial 1 BNB.
Conclusion
Yes. Slippage sucks. Everyone hates slippage, and everyone hates taxes – even in the fiat world. But currently that’s the mechanics of the game. Once you master the mechanics and learn to use it to your advantage, you will be able to effortlessly make your trades and some extra money to buy a Happy Meal.
I hope you now understand what is slippage. As always, if you’re still not sure and this article has done nothing for you, it’s always best to ask someone with a little more knowledge instead of trying to trade yourself and pressing random buttons and hoping something would work. There are many ways to make profits in DeFi, and there a 10x more ways to lose your money – in silly ways. Play it safe. If you have no one to reach out to for help with this, feel free to send us a message in our Telegram group. (Though we may seem like an immature bunch that only sends memes, we’re always here to help)
Great article 👏