Why does price slippage occur in crypto trading?

Key points

• Price slippage (in English: ‘price slippage’) is the execution of a market order at a price that differs from the one specified when the order was placed on an exchange.
• The phenomenon is typical of all assets, including cryptocurrencies. It most often occurs in decentralised finance (DeFi), notably on decentralised exchanges (DEXs).
• In crypto trading, slippage can be caused by high volatility or, conversely, low liquidity. For on-chain trades, the speed of transaction confirmation on the blockchain matters.

How does price slippage arise?

When placing a market order on an exchange, a user expects execution at the quoted price. In practice, the fill can differ to the user’s disadvantage — that is price slippage. It is calculated as a percentage of the notional value of the trade.

Slippage can be driven by a wide bid-ask spread — the gap between the best selling and buying prices — and by a thin order book.

A market with many participants, active trading and ample depth across price levels tends to be liquid — the ability to buy or sell larger amounts without moving the price much. In such conditions, the odds of slippage are close to zero.

Why is slippage common on decentralised crypto exchanges?

Large centralised exchanges have largely solved low-liquidity problems. Even so, slippage can still occur during sharp market moves or when a popular crypto-asset whipsaws. A sudden surge in trading can overwhelm matching engines and delay order processing.

Execution delays are an even bigger risk on DEXs. Trading there happens on-chain and depends entirely on blockchain performance: a new block must be produced for a trade to settle. If the network used by the protocol is slow, users may encounter slippage even during quiet periods.

In most cases, slippage has little effect on price. But when a given instrument is hot — for instance, in a bull market — slippage becomes more noticeable.

According to DeFi Llama, high-throughput chains such as Avalanche, BNB Chain and Polygon are gaining share in DeFi, yet nearly 60% of total value locked still sits on Ethereum, which has modest throughput.

How is the price spread related to slippage?

The market spread is the gap between the best bid and the best offer. It tends to widen when markets are unstable or illiquid.

Buying “at market” means accepting the lowest offer from sellers. Selling “at market” means accepting the highest bid from buyers. 

Assets in strong demand usually have tighter spreads as participants compete and narrow the gap. Popular cryptocurrencies typically have high liquidity.

What types of price slippage are there?

The difference between the quoted and executed price can be positive or negative for the trader. Slippage is usually seen as a negative, though it can occasionally work in one’s favour. 

If a buy order is filled at a lower price than expected, the slippage is positive: the trader gets a better rate.

If a buy order is filled above the expected price, the slippage is negative and the user gets worse terms. The same applies to sell orders. 

Price differences typically arise with market orders. Suppose a crypto-asset trades at $100. An investor wants to sell 20 coins and expects to receive $2000.

Before execution, the price suddenly drops to $98. That is a $2 shortfall on each of the 20 tokens. Slippage in this case is 2%, implying a $40 loss for the trader.

How can you avoid price slippage?

To eliminate or minimise slippage risk, avoid market orders during periods of high volatility and use limit orders instead.

All major centralised exchanges offer limit orders, but most decentralised venues do not (with rare exceptions, such as 1inch). On-chain execution also brings a higher risk of long delays.

There are, however, several basic ways to reduce slippage when trading on DEXs:

1. If you trade on an Ethereum-based protocol, consider increasing the amount of gas you use; otherwise, a transaction may ‘hang’ for a long time, even for hours. You can check the current optimal gas level on Etherscan.
2. Leading Ethereum DEXs often support layer-2 (L2) solutions, which can speed up execution and cut transaction costs.
3. Many decentralised venues let you set a maximum slippage tolerance when submitting an order.

Some centralised crypto platforms have mechanisms to curb slippage. For example, Coinbase temporarily locks in the execution price while a user reviews trade details.

Further reading

What types of bitcoin addresses exist?

What is a “bull trap” in trading and how can you avoid it?

What is on-chain analysis and how do you use it?

What is crypto arbitrage?

What is staking and how can you earn on it?