This page explains the working mechanism of swapping tokens on Integral SIZE and summarizes the benefits of using Integral vs. other swap protocols, decentralized exchanges or aggregators; specifically when considering the execution of large orders.
When discussing the topic of price impact and slippage it is important to note their distinct, yet interconnected differences.
Price Impact is a result of the given liquidity available to settle a transaction. In other words, price impact is the spread between the total value of the tokens being swapped vs. the tokens being obtained (value denominated in a stable unit of account such as USD or USDC).
Slippage is a result of changing market conditions, between the moment a transaction is submitted and the moment of its verification. Thus, slippage refers to the difference between the expected amount and the received amount.
When considering price impact and slippage, the larger the order size, the larger the potential price impact and slippage.
When trading with a CFAMM (Constant Formula Automated Market Maker) swap protocol like Uniswap v2, a trade is moving along a price curve, from point A to point B due to the changes in the amount of tokens held in each pool.
The working mechanism of a swap in Uniswap V2 protocol.
With Uniswap V2, price is defined as the ratio between the amount of two assets, which is also the slope of the curve at each point. When moving between two points, the price will change, which results in price impact.
For small orders, the distance between point A and B is typically not significant and therefore not vulnerable to a large price impact. However, for large orders, this distance is significant, resulting in a disproportionate price impact.
For more details on how to calculate the the impact for CFAMM please read, Price impact and how to calculate it from DailyDeFi.org.
Integral SIZE mitigates and minimizes price impacts on large orders by executing at a time-weighted-average price.
Once the order is submitted, it will wait in the smart contract for 30 minutes before interacting with the pool. During this time, the protocol will pick up price information from the Uniswap V2 oracle and calculate TWAP. After 30 minutes elapses, the protocol will execute the whole order at TWAP.
In terms of the amount of tokens received, this practice delivers the same result as physical TWAP without actually splitting the order, because they are both executed at TWAP.
More importantly, both practices do not experience price impact.
TWAP is mathematically defined as the arithmetic mean of the prices in a period. Suppose the interval between blocks being mined is constant, and 1 ETH = 4,100 USDC on block #1, 4,110 USDC on block #2, and 4,105 USDC on block #3, then TWAP for these 3 blocks is (4,100 + 4,110 + 4,105) / 3 = 4,105 USDC.
A DEX like Uniswap relies on curves to deduce price between two assets based on their amounts in the pool. A large swap will both increase and decrease the amount of assets, thus changing the ratio/price substantially and resulting price impact.
This does not apply to Integral SIZE, whose price is solely determined by the oracle. Even if a large order does change the ratio between two assets, it will not affect the TWAP used to execute the order.
In other words, Integral SIZE does not have a curve. I always fills the order at the oracle twap price, regardless of order size.
It creates the effect that the WHOLE liquidity of the pool is concentrated on the price point of TWAP. In theory, you can even swap all the liquidity out of the pool with 1 single TWAP.
This is de facto “Concentrated Liquidity”. Thus, the difference between Integral Concentrated Liquidity and Uniqswap V3, is that V3 allows a trader to set the price range for their liquidity, but with Integral TWAP, this price range is controlled by the system (oracle).
Please visit the dedicate section to learn more about how Integral TWAP interacts with oracle.
With Integral SIZE the default slippage tolerance is 0.5%, but this can be changed in Advanced Settings (gear icon). However, it's recommended to only change this setting when the market is volatile and your orders are regularly being reverted.
As mentioned, slippage occurs because of changing market conditions between the moment a transaction is submitted and its verification or execution.
Slippage can also be positive or negative. Positive slippage is when an executed order results in more tokens being delivered than estimated when the order was submitted. Negative slippage is when less tokens are delivered.
With respect to positive slippage it’s important to note how some aggregators such as Paraswap and 1inch take 50% to 100% of the positive (respectively) to maintain their business model. In contrast, Integral TWAP returns all positive slippage to the trader.