XFai Deep Dive — Slippage

XFai Deep Dive is a series of educational content for all users of XFai (we will get a name for it in the future). This is to educate users about the background of XFai and what XFai will solve and impact the DeFi space.

After this series, you will understand what we are building and how “close” we are to MOON when we launch our product.

What is the definition of slippage?

In trading, there are two types of risk — market risk, which means that prices will change before you close out your position; and execution risk or “slippage.”

Slippage means that there are extra costs associated with trading.

Slippage happens when there is a difference between the price at which you wish to buy or sell an asset and the price offered by your counter party. This leads to either significant losses or gains due to market volatility.

The resulting difference between what you wanted to pay for an asset and what you actually paid becomes known as slippage.

This may happen when you’re trading on a platform where prices don’t change by much, and your order will be executed at a price not representative of the market rate.

In order for traders not to be subject to slippage, they need to trade on exchanges that offer fair prices without any manipulation, such as Uniswap.

That’s why traders use stop losses as a way to account for uncertainty in markets — they protect against slippage by automatically selling when prices drop too low. In this blog post we’ll explore what causes slippages and how stop losses work.

Slippage may occur depending on the amount of a transaction in comparison to the reserves of an AMM.

As an example, consider the DAI-USDC Uniswap pair.

Given that DAI and USDC are both USD-denominated stablecoins, we can anticipate them to have a similar value. One would assume that exchanging 100 DAI for USDC will result in 100 USDC.

This is not always the case, though.

For instance, if we have a token pair consisting of 100 DAI and 100 USDC, converting 100 DAI to USDC results in just 50 USDC. The remaining 50 USD would be lost as a result of slippage. As a result, slippage is proportional to the transaction’s volume and the depth of the reserves.

The more shallow the DEX’s reserves are, the higher we can expect slippage to be. This issue may arise between any fungible asset on a DEX, not only stablecoins.

What does it have to do with XFai?

All AMMs suffer from an inherent tri-lemma: SSP.

Slippage — Supply — Price.

Optimizing two variables of the tri-lemma lead to problems with the third variable. For DEXs to become widespread, it is necessary to have a design that is able to minimize slippage, while still protecting the AMMs from losing liquidity (Supply variable), or from experiencing high price fluctuations (Price variable). This is the problem that XFai is solving with its novel DEX design. In XFai’s DEX, slippage gets minimized, while still ensuring DEX liquidity and gradual price adjustments.

About XFai

XFai develops tooling for the DeFi space, graphing it to build game-changing products. The XFai DEX is set to invite mid and small-cap tokens to start earning APY on their token holdings, while the XFai LGE is set to become industry-first in providing a more efficient, transparent, and fair way for everyone to get involved at an early stage. The LGE for XFai’s native token, XFIT, was launched on 16th April 2021. We invite everyone to join the DeFi revolution, spearheaded by XFai.

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XFai develops tooling for the DeFi space – we graph the DeFi space to build game-changing products. Starting with the DLO: the DEX Liquidity Oracle