How Do Smart Contracts Manage Slippage on a Decentralized Exchange?
Slippage is the difference between the expected trade price and the price at which the trade is executed, often occurring in large AMM trades. Smart contracts manage this by allowing the user to set a maximum acceptable slippage tolerance.
If the price moves beyond this tolerance during the transaction, the contract automatically reverts the trade, protecting the user from unfavorable execution.
Glossar
Gas Fees
Mechanism ⎊ Gas fees represent the computational cost required to execute transactions or smart contracts on a blockchain network, particularly Ethereum and its Layer-2 solutions, functioning as a deterrent against denial-of-service attacks and a reward for network validators.
Expected Trade Price
Valuation ⎊ Expected Trade Price, within cryptocurrency derivatives, represents a probabilistic assessment of fair value derived from option pricing models and adjusted for prevailing market dynamics.
Maximum Acceptable Slippage
Parameter ⎊ Maximum acceptable slippage is a quantitative parameter set by a trader or algorithm that defines the largest permissible price deviation during order execution.
Slippage
Variance ⎊ Slippage, within cryptocurrency, options, and derivatives, represents the difference between the expected price of a trade and the price at which the trade is actually executed, stemming from market dynamics and order book depth.
Smart Contracts
Function ⎊ Smart contracts are self-executing agreements with the terms of the agreement directly written into lines of code, residing on a decentralized ledger.
AMM
Architecture ⎊ Automated Market Makers (AMMs) represent a paradigm shift in decentralized exchange (DEX) design, moving away from traditional order book models to a constant function market mechanism.