Understanding Price Impact, Slippage and Fees
Understanding Price Impact
Definition and Effects:
Price impact refers to the influence a specific trade has on the market value of an asset pair, which is closely linked to the liquidity in the pool or Automated Market Maker (AMM). In scenarios where market or pair liquidity is low, the price impact can be substantial, potentially leading to losses for the trader. Essentially, a large trade in a small market can significantly disturb the market equilibrium.
Favorable Scenarios:
However, price impact can sometimes work in favor of the trader. If the pool's liquidity is skewed opposite to your trade direction, you may trade at a more advantageous rate than the pool's average, opening opportunities for arbitrage.
Distinguishing Between Price Impact and Slippage
Key Differences:
Price Slippage refers to the price variation resulting from market movements that are not directly linked to an individual trade.
Price Impact, conversely, is the price change directly caused by an individual's trade.
Both are influenced by the liquidity in a pool, with limited liquidity leading to significant rate shifts from minor overall market movements.
Interestingly, slippage can sometimes be beneficial. If the exchange rate shifts advantageously, you receive extra tokens in a swap. As you deserve!
Strategies to Reduce Negative Price Impact
Fibrous’ Pathfinder Algorithm: Fibrous’ algorithm is designed to distribute trading volume across various liquidity sources, minimizing the adverse price impact. However, for tokens with a single liquidity source, especially illiquid ones, optimizing price impact is challenging.
Personal Strategies: To reduce swap price impact, consider trading smaller volumes or waiting for increased market liquidity. For certain tokens, especially those from dubious projects, this liquidity boost may never arrive. Ensure the "Minimum received after slippage" reflects accurate token counts based on current market rates.
Managing Slippage on Fibrous:
Slippage Tolerance Settings:
Fibrous features a "Slippage Tolerance" option, allowing traders to set a preferred slippage percentage for their trades. The platform typically uses "auto-slippage," adjusting tolerance based on the pair's volatility. This option can be found and adjusted in the general settings, with the ability to pin the 'slippage tolerance' display to the main swap interface for easy access.
If the final token amount deviates beyond the set slippage tolerance during the trade process, the transaction will be aborted, preventing significant losses despite non-refundable gas costs.
Implications of Extreme Slippage Tolerance Settings:
The ideal slippage tolerance varies by token, transaction, and personal preference.
What are the implications of extreme slippage tolerance settings?
The perfect slippage tolerance level often varies depending on the token, transaction, and individual preferences.
Too High
An overly generous slippage tolerance permits the trade to finalize even with substantial price shifts, exposing the user to potential front-running and sandwich attacks. In a sandwich attack, a malicious actor places two larger trades just before and after a target transaction, forcing the target to buy at a higher rate. By the victim having a high slippage tolerance, the attacker gains more. While the likelihood seems minimized on the Starknet network at the moment, as the Fibrous team, we are working on developments for MEV-resistant transactions and preparing to offer you the best experience.
Too Low
A very strict slippage tolerance might cause the transaction to be rejected if price fluctuations surpass the designated percentage. While this might ward off front-runners, it also results in wasted gas fees for the botched transaction.
A transaction that gets rejected due to very low slippage tolerance will display "Fail with error 'Min return not reached'" when inspected on a block explorer.
Positive Slippage
As we emphasized, these price impacts can also be positive. For such transactions, Fibrous ensures you can obtain a positive return. With Fibrous, you can catch arbitrages as you deserve and earn.
Gas and Transaction Fees
Just as with EVM chains, gas fees and mechanisms for Starknet's CairoVM are vital for the network's operation and protocol flow. Therefore, specific gas fees are charged for every transaction executed, and if these fees are met, your transaction is processed.
As of now, the gas token for the Starknet network is Ether (ETH). Therefore, you should have enough Ether for the transactions you will perform on Fibrous.
Commission Fees
Fibrous is not just a Decentralized Exchange platform; it also aims to offer users the best DeFi experience by integrating a wide range of DeFi applications and infrastructures. For all these services, Fibrous charges a fee of 0.02% for single-route transactions optimized within the protocol and 0.15% for multi-route transactions.
Don't worry, you can still track arbitrage opportunities and execute for the best price.
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