What is slippage and Price impact?
Slippage is the concept of being affected by the difference in price, between the point at which you send your transaction and the moment it gets completed.
As an example, imagine swapping your ETH for SUSHI in an attempt to exit an ETH dump and enter a SUSHI pump.
However, while waiting for your transaction to get mined, the price of ETH drops by 1%, while SUSHI went up by 1%: this would incur a 2% slippage. If you had set your slippage below this amount, the swap would fail!
It's useful to think of setting slippage percentages like this: you are effectively inputting a minimum quantity of tokens you will receive from the swap.
Slippage Tolerance is a percentage measure of the upper bound (maximum) slippage you will allow for your swap(s). When you select Slippage Tolerance, you will see two options: Auto and Custom.
Auto is the default setting, and is set at 0.5% - if the slippage amount were to be greater than this when executing a swap, the swap would revert and not go through.
Custom will bring up an input field to set a custom percentage amount for your slippage tolerance. This setting should only be set by people who are confident in what they are doing and setting here.
If you are unsure, we highly recommend keeping the Auto default slippage tolerance.
Price Impact is affected by the size of your trade relative to the available liquidity within the pool. It is a function of the constant product formula, which is defined as: x∗y=kx∗y=k.
In a traditional order-book model, you might have an asset that trades at $10. However, if a buyer with a large enough order comes around, he/she may take up all the offers to buy the asset at $10, $11 & $12. This will cause the average buying price on that asset to fall somewhere in between the range of $10 to $12 for that particular individual.
With an AMM (Automated Market Maker), the value of an asset is directly related to the balance of tokens in the pool. This balance is shifted during the swap, thus the final execution price will always fall somewhere in between.
A general rule to remember is that price impact will be around twice the size of your order relative to the size of the pool.