What is Slippage Tolerance?
Slippage tolerance is a user-defined setting that specifies the maximum percentage difference between the expected price at trade submission and the actual execution price. It acts as a safeguard against unfavorable price movements during the time between submitting a transaction and its on-chain confirmation.
How Slippage Tolerance Works
When you execute a swap on a decentralized exchange, you see a quoted price at the moment of submission. However, blockchain transactions take time to confirm, and during this period other trades can execute that change the pool's price. Slippage tolerance defines how much price movement you will accept.
If you set a 0.5% slippage tolerance on a swap, the transaction will only complete if the execution price is within 0.5% of the quoted price. If prices move beyond this threshold during confirmation, the transaction reverts and you receive your original tokens back, minus any gas fees paid.
Choosing Appropriate Slippage Settings
The optimal slippage tolerance depends on several factors. For stablecoin pairs with deep liquidity, 0.1% or less is usually sufficient. For major tokens like ETH or BTC on established pools, 0.5% is typically adequate. For smaller cap tokens, less liquid pairs, or during volatile periods, 1-3% or higher may be necessary to ensure execution.
Setting slippage too low risks failed transactions, wasted gas fees, and missed trading opportunities. Setting it too high exposes you to front-running attacks and larger than necessary price concessions.
Front-Running and MEV Considerations
High slippage tolerance settings make you vulnerable to sandwich attacks, a form of MEV extraction. In a sandwich attack, a malicious actor observes your pending transaction, places a buy order before yours to push the price up, lets your transaction execute at the worse price, then sells immediately after for profit.
To mitigate this risk, use the lowest slippage tolerance that allows your transaction to complete. Consider using MEV-protected transaction submission services like Flashbots Protect. Be especially cautious with large trades where sandwich attacks are more profitable for attackers.
Slippage in Different Contexts
Different DeFi activities have different slippage considerations. Simple swaps require slippage protection for price movement during confirmation. Adding or removing liquidity also involves slippage as pool ratios can change. Cross-chain bridges often require higher slippage settings due to longer confirmation times across multiple networks.