How Does Slippage Affect Arbitrage in Decentralized Exchanges (DEXs)?
Slippage is the difference between the expected price of a trade and the price at which it is actually executed. In DEXs, which use automated market makers (AMMs), large arbitrage trades can significantly impact the price, leading to high slippage.
This slippage can reduce or completely eliminate the potential profit from an arbitrage opportunity. Arbitrageurs must carefully calculate potential slippage before executing a trade, as it directly subtracts from their gains.
Glossar
Liquidity Pools
Provision ⎊ Liquidity Pools are smart contracts holding reserves of two or more assets, facilitating automated trading via an algorithmic pricing mechanism rather than a traditional order book, and are the backbone of decentralized exchange functionality.
Arbitrage
Exploitation ⎊ Arbitrage, within cryptocurrency, options, and derivatives, represents the simultaneous purchase and sale of an asset in different markets to capitalize on transient price discrepancies, effectively a risk-free profit opportunity.
Automated Market Makers
SystemArchitecture ⎊ Automated Market Makers represent decentralized trading protocols that utilize algorithmic functions, rather than traditional bid-ask order books, to facilitate peer-to-contract asset exchange.
Decentralized Exchanges
Access ⎊ These platforms offer permissionless entry to cryptocurrency and tokenized asset markets, democratizing capital deployment into novel financial structures.
Impermanent Loss
LiquidityRisk ⎊ Impermanent Loss quantifies the temporary divergence in value between holding assets in a decentralized liquidity pool versus simply holding those same assets in a non-interest-bearing wallet, resulting from price movements between the deposited pair.
Dex Aggregators
Architecture ⎊ Dex aggregators represent a critical layer within decentralized finance (DeFi), functioning as smart contract systems designed to source liquidity across multiple decentralized exchanges.