Slippage

When buying or selling through a subnet (liquidity) pool, there is an inherent loss of value during the purchase called slippage.

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The larger the purchase amount, the higher the slippage.

What is slippage?

Due to the limited resources of the liquidity pool, any change in the ratio of tao/alpha will effect the price and exchange rate. The act of making a purchase through the subnet pool changes the ratio, and effects the rate at which the exchange is placed.

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Slippage occurs when staking AND unstaking alpha.

Slippage formulas

The tao/alpha conversion price cannot be used to calculate a transaction. You must use the following equation to determine the α_received:

The opposite occurs when unstaking alpha to buy tao:

The amount received will be less than the amount expected from the direct price conversion. The difference is denoted as slippage (generally shown as a percentage):

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Example 1 (large purchase = large slippage):

A subnet pool has 100α and 100τ. alpha:tao is 1:1, so the alpha price is 1 tao.

A tao holder wishes to sell 1,000 tao for alpha. Following the exchange rate of 1:1, you might assume 1,000α would be received. But there is just 100α in the pool, so using the equation above 90.9α is received.

This results in a slippage of 90.91%:

Large purchases of tao or alpha will have large amounts of slippage.

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Example 2 smaller purchase

A subnet pool has 100α and 100τ. alpha:tao is 1:1, so the alpha price is 1 tao.

A tao holder wishes to sell 10 tao for alpha. Using the equation for alpha_expected, they will receive 9.09α.

This results in 9.1% slippage.