Slippage is an unavoidable factor in decentralized finance (DeFi) projects. But how can you tackle it? This blog gives you a list of DeFi platforms and their strategies to overcome the slippage.
Understanding Slippage
Slippage is referred to as the difference between the actual price and the expected. It is one of the key points to take into consideration while creating or using any DeFi platform. It will inevitably impact your trades.
Suppose you want to buy a token, then you use a Defi platform to purchase that token. The platform will give you the number of tokens you will receive for the entered/submitted amount. Then, you start buying.
During your transaction processing if some users buy/sell that particular token in large quantities, then it will affect the price of crypto-tokens. It will lead to a change in the token price. So, you will either get more or fewer cryptos than the stated quantity.
These price changes are called slippage, and several DeFis are using various methods to overcome this problem.
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Strategies by DeFi Platforms to Avoid Slippage
Here is the list of several Defi platforms and strategies they are using to avoid slippage:
Uniswap
Uniswap uses an AMM (automated market-making) strategy to manage slippage and liquidity. It has a liquidity pooling system that enables rewarding trading fees to liquidity contributors for supporting the network. By using this network of providers, Uniswap completes the orders for crypto traders.
The platform creates a unique way to overcome slippage. The mechanism prevents traders from buying entire liquidity for a pool that makes the price higher for larger orders. We can resolve it by having a large number of providers, which will grow eventually as the platform grows.
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Kyber
It uses a diversified liquidity system that includes liquidity pools, makers, token holders, and token projects. These contributors interact with a smart contract. Kyber created this smart contract to enable setting up a reserve. There are three types of reserves, namely an Orderbook Reserve, an Automated Price Reserve, and a Fed Price Reserve.
This diversified model helps Kyber to maintain a large supply of liquidity and foster an ecosystem for crypto usage.
Bancor
Bancor created a self-balancing mechanism. They have developed their token, BNT, which will act as the intermediate for managing the reserve balance. Using this contract doesn't require matchmaking and uses its token for doing the balancing. As long as a crypto-token has a BNT reserve.
Similarly, several other platforms are using their machines to prevent this slippage problem.
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Conclusion
In this, we get to know about the slippage problem and how different DeFi platforms are using various mechanisms to prevent this problem. You can use this mechanism to overcome the slippage problem.
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