The price difference between the time a market order is placed and the time it is filled or completed on the blockchain is known as price slippage. Depending on how the price changes, slippage can be either beneficial or negative. So, we get the idea of slippage now. Then, what is slippage tolerance? What does slippage tolerance mean?
The amount of price slippage you are ready to take for a trade is determined by your slippage tolerance setting. By establishing a slippage tolerance, you essentially decide how many tokens, at least, you will accept in the event that the price rises or falls. A percentage of the total exchange value is chosen as the slippage tolerance. If your slippage tolerance is set to 3%, for instance, the number of tokens you get cannot be greater than or less than 3% of the quantity you entered.
A "sweet spot" is frequently found while adjusting the slippage tolerance. Based on each unique token, transaction, and your specific risk tolerance, this optimal quantity varies.
When the slippage tolerance is set very high, the transaction can still be completed even when there are significant price fluctuations. Sandwich and front-running attacks may then be possible. A sandwich attack is a type of front-running in which the attacker observes a transaction that is about to be processed, and then immediately before and after the victim's transaction, places too much larger transactions (using the same tokens). As a result, the victim's transaction costs increase, making it possible for the front runner to pocket the value discrepancy. The attacker can gain so much value from the attack because the victim's slippage tolerance is so great.
This might be easily avoided by enabling the "partial fill" setting in addition to choosing a smaller slippage tolerance.
The transaction may fail (revert) if the price goes beyond the given percentage if the slippage tolerance is set too low. A low tolerance can stop front running, but it can also result in a failed transaction and a loss of gas money.
Summary, “What is slippage tolerance?”
When users are swapping on AMMs, slippage tolerance refers to the pricing discrepancy between the price at the time of confirmation and the actual price of the transaction. A percentage of the total exchange value is chosen as the slippage tolerance.
