Slippage describes the discrepancy between the anticipated trading price and the actual trading price which results from executing a trade. Slippage occurs in cryptocurrency markets when there are two conditions which create high volatility and low liquidity because prices experience rapid changes from order placement until actual order completion.
A trader attempts to purchase Bitcoin at a specific price, but by the time his order reaches execution, the market price has moved upward. The trade is completed, but at a less favorable rate than expected. If prices decrease before the execution of a trade, the same situation occurs to sellers. Slippage defines the difference between expected price and actual price which results from order execution.
Slippage occurs with greater frequency in markets that maintain thin order books and during times when traders execute large volume transactions. When there is insufficient demand and supply at a particular price point, the execution of a trade occurs at multiple price points. This situation may lead to higher average entry expenses or decrease total sale revenue.
The automated market maker systems used in decentralized finance platforms experience slippage because their liquidity pools contain different token ratio distributions. Liquidity restrictions cause larger trades to create major price changes because pool assets cannot support the required trade volume.
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Traders in crypto reporting use the term slippage to describe three essential aspects of their trading activities which are trading conditions and liquidity problems and execution dangers. It shows the difference between theoretical prices and actual market pricing.