What Is ‘Slippage’ and How Does Low Liquidity Exacerbate It?
Slippage is the difference between the expected price of a trade and the price at which the trade is actually executed. It occurs when market conditions change between the time an order is placed and when it is filled.
Low liquidity exacerbates slippage because there are fewer tokens available at the desired price level. A large market order in a low-liquidity pool will move the price significantly, resulting in a much worse execution price for the trader.
This is a common issue on decentralized exchanges (DEXs) with thin order books.
Glossar
Low Liquidity
Impedance ⎊ Low liquidity within cryptocurrency, options, and derivatives markets signifies a diminished capacity of market participants to execute substantial trade volumes without causing significant price impact.
Decentralized Exchanges
Access ⎊ These platforms offer permissionless entry to cryptocurrency and tokenized asset markets, democratizing capital deployment into novel financial structures.
Market Conditions
Volatility Correlation ⎊ Market Conditions, specifically the prevailing level of realized and implied volatility for the underlying crypto asset, are the primary input for pricing options and setting margin requirements for futures contracts.
Expected Price
Price ⎊ Within cryptocurrency derivatives, options trading, and financial engineering, price represents the prevailing market valuation of an underlying asset, reflecting a complex interplay of supply, demand, and anticipated future performance.
Market Order
Execution ⎊ A market order represents an instruction to execute a trade immediately at the best available price within the current order book, prioritizing speed of execution over price certainty.
Liquidity Provision
Capital ⎊ Supplying assets to decentralized pools forms the essential base layer for automated trading and derivatives pricing across the digital asset landscape.