Slippage and Price Impact in DeFi Explained

In the next two blog posts, we will walk you through one of the most important concepts of Integral, slippage and price impact. This is part 1.

Why it matters: For large and small traders alike, getting the best execution can be the difference between a winning and losing trade. In DeFi, there are still lots of opportunities to improve the trading experience.

Zoom in: One of the most frustrating parts of trading on-chain assets through decentralized exchanges is dealing with slippage and price impact. In this article, we will dive in with the whales to explore whether there is a decentralized exchange that can deliver zero slippage or price impact.

Zoom out: Slippage in DeFi is a big problem. Therefore, we built Integral SIZE is a new DEX design that eliminates price impact and slippage.

What is slippage?

Slippage is the difference between the quoted price of a trade and the final execution price. Slippage is a feature of all financial markets because there is always a delay between when a trade is “sent” by a trader to when the trade is executed on the blockchain. During this time, the market price can move from the price quoted to the trader.

Exchanges provide a quote price based on current market conditions, and the trader can set an acceptable slippage percentage they are willing to take for the trade. Anything outside of this range and the transaction will revert, canceling the trade.

Slippage tolerance setting in the Uniswap UI

Slippage can be positive or negative depending on the movements of the market. Negative slippage is when the trader gets a price worse than the quoted price, while positive slippage means the trader would get a better price.

What causes slippage?

When trading on chain with a decentralized exchange various factors influence price slippage:

  • block confirmation times
  • volume
  • liquidity for the token pair being traded
  • design of the decentralized exchange’s automated market maker

Block confirmation times determine the time between when a transaction is sent and when it is confirmed. Even the fastest-confirming transactions on Ethereum take 13 seconds while a new block is mined. On other chains and L2s this can be faster, but it will change based on the gas prices a trader is willing to pay and the amount of traffic on the network.

Trading volume is also an important variable in price slippage. If a token market has a high volume of trades, the price can move between the time a trade is sent and the time it is confirmed on the blockchain.

As many altcoin traders will know, trading pairs that have low liquidity also causes high slippage. Because most decentralized exchanges use a variation of a 50/50 liquidity pool and a price curve, large trades can quickly unbalance the pool causing slippage. This is a problem for many altcoin pairs which see large price swings on trades as small as $10,000. Altcoin trades often require setting slippage to 20% or more to go through.

The design of a DEX can greatly change the slippage for trades. Different liquidity conditions, price curves, and other implementation quirks all change how slippage is realized in the market and can change the final price of a trade.

Slippage vs price impact

While the terms are often used interchangeably, slippage and price impact. You can think of slippage as the changes due to the market and price impact as the change caused just by your trade.

DeFi vs TradFi slippage

Despite explosive growth over the last few years, DeFi lacks capital-efficient trading venues and even the largest liquidity pools have yet to match the volumes of their traditional finance counterparts.

In traditional finance, almost no trader would accept a price impact of more than 5-10% outside of exceptional circumstances. In part this is because traditional markets are more mature and have more liquidity than DeFi markets. In traditional financial markets, liquidity is deeper and market makers more readily step in to enhance liquidity conditions.

In the first generation of DeFi, the focus was on decentralization above all else. This lead to a huge amount of innovation with the invention of automated market makers and various approaches to allow for permissionless liquidity deployment and trading. While the advent of decentralized trading has ushered in the first era of decentralized finance, it came at the expense of trading execution.

Traders working in DeFi have had to deal with price impact and slippage that would be unheard of in traditional financial markets. The next generation of DeFi will look to put execution on par with traditional finance. This means that platforms will need to meet the high standards of professionals from the world of TradFi while maintaining the trustless nature of DeFi that defines the space. Only by meeting or exceeding these standards will DeFi be able to attract meaningful adoption by the larger world of finance.


Integral Insights


May 9th, 2024

Integral Insights April ‘24

The combined average daily volume across Ethereum and Arbitrum is now at 8.8 million USD, a remarkable 22% increase compared to last month.


April 25th, 2024

Introducing New Pool Analytics: Elevate Your Liquidity Provision Experience

A standout feature in our latest update is the "LP vs Hold" tab, which provides a comparative analysis of various holding strategies against Integral's LP positions.


April 1st, 2024

Integral Insights March ‘24

We achieved several important milestones, including a new all-time-high daily volume for Arbitrum and the addition of four new pools on the Ethereum mainnet.


March 4th, 2024

Integral Insights February ‘24

Another milestone was reached on February 21st when Integral processed over $2 billion in cumulative volume.


February 1st, 2024

Integral Insights: January ‘24

Our initial launch with the ETH-RPL pool was a success, quickly elevating us to the second most utilized liquidity pool for this pair’s trading.


January 17th, 2024

Is Liquidity Fragmentation Really That Bad?

When the token evolves into a store of value, it attracts outside traders, focusing on trading costs and slippage. This is when concentrated liquidity truly shines.


January 2nd, 2024

2023 Review

At Integral, our focus remains on developing a sustainable product for on-chain trading, serving both traders and liquidity providers.


December 12th, 2023

Integral Now Rewards Liquidity Providers with Trading Fees on Ethereum Mainnet

This enhancement enables liquidity providers (LPs) to directly receive a portion or all trading fees from Integral pools.


December 6th, 2023

Integral Insights: November ‘23

During November, Integral processed an average of approximately 6 million in volume with around 1.5 million in TVL. The system’s overall capital utilization sits at around 350%. It is the 10th most used DEX on Ethereum.


November 28th, 2023

Integral Now Rewards Liquidity Providers with Trading Fees

This enhancement enables liquidity providers (LPs) to directly receive a portion or all trading fees from Integral pools.


November 15th, 2023

How Do University Blockchain Societies Gain So Many Votes?

Explore how university blockchain societies like FranklinDAO and Michigan Blockchain have grown into influential players in DAO governance, utilizing delegated votes and strategic partnerships to shape the future of DeFi protocols like Uniswap, Compound, and Aave.


November 6th, 2023

Integral Insight: October ‘23

We give an update for our work in October and highlight a profitable LP position from a long-term user.


October 26th, 2023

Understanding the Stakes in Lido’s Growing Share of Staked ETH

The community is arguing whether a protocol may have too much control over the Ethereum network. Lido controls a large percentage of staked ETH, which could have consequences for the network’s future security and neutrality.


October 14th, 2023

Changes to Staking and Farming

Looking back at our progress so far and to the future with new updates to staking and farming.


October 11th, 2023

Integral Insight: September ‘23

We give an update for our work in September with utilization going up on higher volume for our new pools.


October 11th, 2023

The Hottest Narratives of the Summer

What were the hottest narratives of the summer? Our DeFi research team delves into the growth of trading bots, RFV traders and more in this overview.


October 2nd, 2023

Uniswap Governance: A Deep Dive

Governance is considered a critical component for the decentralization and community-driven development of DeFi protocols. We take a look at one of the largest goverance ecostystems in DeFi, Uniswap. In this blog post, we'll discuss the landscape of Uniswap's governance, pulling data from empirical research to dissect the system's delegates and proposals, revealing some interesting findings.


September 19th, 2023

What is the DAI Savings Rate (DSR)?

Our research team takes a look at the DAI Savings Rate and its influence on various yield dynamics in DeFi.


September 15th, 2023

Integral Insight: August ‘23

We give an update for our work in August with cheaper gas fees and the launch of the Integral Relayer on Arbitrum!


September 7th, 2023

Integral Relayer Launches on Arbitrum

We are excited to announce the launch of the Atomic Relayer on Arbitrum. This will bring the efficient and tested system for atomic trades to the Arbitrum Layer 2 network!