Crypto Infrastructure
The quoted price is not a promise. Your order eats through the book.
You press buy at one price and the fill comes back worse. That gap is slippage — a hidden cost sitting next to the fees. It appears when there simply is not enough resting at the price you were shown.
The problem
Same order. Same quote. Two books.
Both books show the same best price — 1.03 $ — and both hold the same three price steps above it. The only difference is how much is resting at each one. Buy 1,000 units on each side and watch where the order ends up.
1,000 units, fired into both
ILLUSTRATIVE MODELNothing has traded yet. Both ladders are resting sell orders — the depth waiting at each price. The figures are a model of the mechanism, not a real market. Press Fire the order into both books.
Identical order, identical quote, identical price steps. On the deep book 4,000 units were resting at 1.03 $, so all 1,000 filled there and the average is the quote. On the thin book only 250 were resting at 1.03 $, so the remainder ran through the steps above it: 250 at 1.05 $, then 500 at 1.08 $. The average landed at 1.06 $ instead of 1.03 $. That difference is slippage, and it scales with the size of the order relative to the liquidity behind the price — not with the size of the order on its own.
Nobody took it. Every seller received exactly the price they had posted before your order arrived — the same price they would have got from anyone. No slippage line appears on any fee schedule, because there is no slippage line: nothing was charged, nothing was collected, and the bottom row stays at zero however far the order walks. Slippage is not a fee. It is an indirect cost that falls out of market structure — liquidity, order size and how fast the market is moving — and it is the proof that the displayed price is not always the execution price.
The definition
Three things slippage is, and one thing it never is.
Tap each card for what is actually happening underneath.
Hands on
Set the most you are willing to slip.
On a venue that trades against a liquidity pool you set a slippage tolerance — the maximum deviation from the displayed price you will accept. Drag it and watch the consequence, measured against the thin-book fill you just ran.
Balanced
The tolerance is an upper bound, nothing more. Exceed it and the trade fails. Too tight and it fails constantly; too wide and you sign up for a noticeably worse fill. Notice what it does not do: it never removes the slippage. It only decides how much of it you are prepared to live with before the order is abandoned.
The bridge
Same cost, two different machines.
An order book and a liquidity pool produce slippage for different reasons.
On an order book you can see the steps your order will walk. In a pool there are no steps to look at — there is a ratio between two assets, and your own trade moves it. How that ratio works, and why the size of the pool decides everything, is the next lesson: liquidity pools.
Check yourself
Five questions.
Answers come straight from this lesson. Submitting completes it.