An overview of the risks of price slippage in DeFi and how to mitigate them [AD]
Price slippage is a constant risk in trading on centralized exchanges and decentralized exchanges alike. It occurs when a trader’s order is executed at a different price than the one intended. It can happen due to high volatility, low liquidity or delays in order execution, resulting in a noticeable difference between the expected and actual transaction price.
The depth of an order book is defined by the quantity of buy and sell orders at different price levels. Market depth is a key indicator of liquidity on any platform. Thus, the greater the market depth, the lower the chance of price slippage, thanks to the balance between buy and sell orders. Since order books are managed by centralized entities, DEXs don’t have these at all. Instead, they employ the model, which implies pre-funded pools for each cryptocurrency pair to cover both sides of trades. The liquidity pools are supplied by liquidity providers, who get incentivized to lock an equal value of both cryptocurrencies of a pair. The trading fees on the DEX are distributed to all liquidity providers, who take the role of market makers.
To reduce the risk of price slippage, DEXs have to ensure high liquidity in their pools. There is no DEX capable of competing with large CEXs in terms of liquidity, but DEX aggregators can do the trick. DEX aggregators ensure a high degree of liquidity by having access to multiple DEXs at once. Features like order splitting and order routing can further reduce the risk of price slippage. is a relevant example of a DEX aggregator.
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