How should I set my slippage tolerance?

Slippage is a core concept in all trading markets, and crypto is no exception. Slippage tolerance gives you a way to control the margin of price variance you're willing to accept on a trade.

Understanding how to properly evaluate slippage tolerance is crucial for effectively executing trades while protecting your portfolio.

In this article, we'll help you:

• Understand what slippage tolerance is.

• See how to evaluate your own slippage tolerance.

• Learn how CoW Swap's architecture helps you trade with optimal slippage.

What is Slippage Tolerance?

Slippage is the difference between the price you expect for a trade and the price at which the trade actually executes. Slippage tolerance is a value you set when placing an order that determines how much that price is allowed to change.

Since trades on the blockchain are executed in a queue, the price at the time of execution is often different from the price when you placed your order. Slippage tolerance is a necessary aspect of executing trades on-chain, especially in fast-moving markets. If the price moves beyond your set tolerance, the transaction will fail-but you'll still be charged gas fees for the failed transaction.

There are two types of slippage:

Positive Slippage: This is when the executed price is better than what you expected. For example, you place a buy order for ETH at 4,000 USDC. By the time the trade executes, the price has dropped to 3,920 USDC. The price has slipped by 80 USDC, saving you money!

Negative Slippage This is when the executed price is worse than you expected. Let's say you're selling ETH and expect 4,000 USDC, but the trade executes at 3,920 USDC. That 80 USDC difference is negative slippage.

In both cases, your slippage tolerance setting determines whether the trade goes through. In the example above, a slippage tolerance of 2% or more would allow the trade to execute, while a lower tolerance would cause it to fail.

Slippage: A Risk/Reward Balance

When setting your slippage tolerance, you're balancing the risk of a bad trade against the risk of a failed trade.

Benefits of Higher Slippage Tolerance

More Reliable Execution A wider slippage tolerance means your transaction is more likely to go through. When markets are volatile, a narrow tolerance can cause your trades to fail frequently, costing you gas fees without completing the trade.

Potential for Positive Slippage A wider tolerance opens the door for positive slippage. While it's not a guaranteed win, a higher setting gives you a greater chance of capturing a more favorable price if the market moves in your favor during execution.

Risks of Higher Slippage Tolerance

Higher Losses on Negative Slippage Just as a wider tolerance can offer bigger profits, it can also lead to bigger losses. If the market moves against you, a high slippage tolerance will allow the transaction to execute at a much worse price, costing you more than you intended.

Vulnerability to MEV Attacks:

Your slippage tolerance represents the maximum amount of value an MEV attacker can extract from your trade. MEV (Maximal Extractable Value) is a term for the value that can be extracted by manipulating the order of transactions. For example, a "sandwich attack" involves an attacker placing a trade just before and just after yours to profit from the price change your transaction creates. If your slippage tolerance is 2%, an attacker can extract up to 2% of your trade's value.

Factors for Deciding Your Slippage Tolerance

When setting your slippage, you need to consider a few key factors:

Market Volatility In a volatile market, prices change in seconds. A wider slippage tolerance is often necessary to ensure your trades go through. While this can expose you to greater risk, a very tight tolerance may cause you to miss out on unpredictable, short-term profit opportunities. It's often better to protect yourself from large price swings and potential MEV attacks by maintaining a reasonable, rather than overly aggressive, tolerance.

Transaction Necessity How important is it for this specific transaction to succeed? If you urgently need to exit an asset, accepting more risk with a higher slippage tolerance might be worth it to avoid getting stuck. This factor is difficult to quantify, so rely on your fundamental trading strategy and intention.

Sandwich Attack Risk The amount of MEV activity in a given market is a huge consideration. If the market is a "Wild West" for MEV, protecting yourself with a tighter slippage tolerance is crucial. If there is significant MEV deterrence, you can afford to have a wider tolerance and more flexible trading. This is where a healthy market, free from MEV, benefits all traders.

Optimal Slippage with CoW Swap

At CoW DAO, we built CoW Swap to create a fairer, safer trading environment. CoW Swap is an intent-based exchange that aligns incentives between transaction solvers and traders. It leverages Coincidence of Wants to save on gas fees and optimize on-chain performance.

How CoW Swap’s Architecture Optimizes Slippage

Our exchange is designed to protect you from the ground up:

• Intent-Based Trading: When you submit a trade on CoW Swap, you don't send a transaction directly to the blockchain. Instead, you sign a message-an "intent"- that declares your desired outcome. This intent is then sent to a network of "solvers" who compete to find the most efficient and secure way to fill it.

• Solver Competition: Solvers can find the best prices for you across all available liquidity sources. They are incentivized to provide the best possible solution, and this competition includes optimizing for slippage. This system discourages MEV attacks because the solvers' goal is to benefit you, not exploit you.

• Built-in MEV Protection: Our protocol is inherently designed to protect users from MEV. By not exposing your transaction to the public mempool, we shield you from common attacks like frontrunning and sandwiching.

• Extra Security with MEV Blocker: For even greater peace of mind, we also offer MEV Blocker, a tool that protects your transactions across the entire Ethereum ecosystem.

In fact, data shows that CoW Swap offers a low default slippage the overwhelming majority of the time compared to 0x and 1inch. When higher slippage is required, a sizeable chunk of that is returned back to you in the form of a surplus, taking a lot of the headache out of slippage all together.

These factors give you the security you need to set your slippage tolerance based on your trading strategy, not on a defensive need to protect yourself from attacks.

Ready to trade with confidence? Try CoW Swap today!

FAQs

What is slippage in crypto?

Slippage is the difference between the price at which a cryptocurrency order is submitted and the price at which it's actually executed. For example, if you place an order to buy 1 ETH at $3,000 but the transaction completes at $2,980, the $20 difference is slippage. This occurs because crypto prices fluctuate constantly, making some price difference between order placement and execution almost inevitable.

What is a slippage tolerance?

Slippage tolerance is the percentage deviation in price that a trader is willing to accept when executing a cryptocurrency trade. For instance, setting a 2% slippage tolerance when buying 1 ETH at $3,000 means your trade can execute as long as the final price falls between $2,940 and $3,060. Without setting an appropriate slippage tolerance, trades may fail during price fluctuations, potentially still incurring gas fees and requiring you to resubmit the transaction.

What slippage tolerance should I use for different assets?

For stable assets like stablecoins, a low slippage tolerance of 0.25% to 0.5% is typically sufficient since their prices don't fluctuate much. Standard assets with medium volatility profiles like Ethereum generally work well with a slippage tolerance between 0.5% and 2%. Highly volatile assets such as memecoins or new token launches may require double-digit slippage tolerances to ensure trades go through, though this comes with increased risk of exploitation.

What are the dangers of using high slippage tolerance?

Setting a high slippage tolerance can expose you to price exploitation through maximal extractable value (MEV) attacks, particularly sandwich attacks. In a sandwich attack, MEV bots place transactions before and after yours, pushing the price to your maximum slippage tolerance and then selling at the elevated price, essentially extracting value from your trade. These attacks are not rare—MEV losses on Ethereum total over $1.3 billion to date, making it important to use the lowest workable slippage tolerance.

What is auto-slippage and how does it help traders?

Auto-slippage is a feature offered by some exchanges that automatically calculates the optimal slippage tolerance based on the assets being traded and current market conditions. CoW Swap, for example, uses an advanced auto-slippage system where third-party "solvers" calculate optimal slippage and execute trades on behalf of users, taking on all MEV risks. Data shows that CoW Swap offers lower default slippage than competitors like 0x and 1inch, allowing even beginners to trade without worrying about slippage settings.