This page explains the working mechanism of swapping tokens on Integral and summarizes the benefits of using Integral vs. other swap protocols.
Price Impact vs. Slippage
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.
As mentioned, slippage occurs because of changing market conditions between the moment a transaction is submitted and its verification or execution.
With Integral, 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.
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.
How Does Integral Minimize Price Impacts?
Integral mitigates and minimizes price impacts on large orders by executing at a time-weighted-average price.