How to check slippage and market depth on Uniswap V3?

With the launch of Uniswap V3, the platform took a giant leap forward in terms of efficiency and flexibility. However, as the crypto space continues to expand, token projects face a significant challenge: active liquidity management and protection against impermanent loss. Critical aspects of liquidity ensuing are: market depth and slippage. In our recent report prepared by Empirica Liquidity Lab: “Token Liquidity Ranking on Uniswap V3”, we calculate these metrics for 500 most liquid tokens.

Liquidity challenges on Uniswap v3

Uniswap V3 boasts over 10,000 pools, each representing a unique trading pair. However, this number of pools doesn’t translate into a bonanza for investors. In reality, only a fraction of these pools offer sufficient liquidity for trading. The problem lies in the fact that most pools have limited liquidity, making it challenging for investors to execute trades without incurring substantial slippage.

Slippage refers to the difference between the expected price of a trade and the price at which it is executed. In simple terms, it’s the hidden cost of trading. High slippage can significantly decrease profits and create unfavorable trading conditions. Empirica’s report seeks to address this issue by identifying which tokens have enough liquidity for trading and what trade sizes are viable without causing excessive slippage.

The Significance of Slippage and Market Depth

To understand liquidity on Uniswap and our report’s findings, it’s essential to understand the significance of slippage and market depth. Slippage is a critical metric because it provides insights into the potential price impact of a trade based on its volume. In other words, it reveals how much the market price can change when executing a swap. For traders and investors, lower slippage is synonymous with more favorable trading conditions.

Situation 1: Sufficient Market Depth within the current price = low Slippage
Situation2: Gaps in Market Depth, caused by static liquidity provision, result in high Slippage for investors

Market depth, on the other hand, represents the total amount of liquidity available around the current market price. This is the liquidity that truly matters for investors as it determines how much of an asset they can buy or sell without causing significant price fluctuations.

Situation 1: Sufficient Market Depth for larger trades.
Situation 2: Typical situation during bear market, when liquidity was provided once and wasn’t moved, even when the price changed considerably

Our approach to assessing token liquidity on Uniswap V3

Our methodology involves ranking all Uniswap pools with a daily volume exceeding $10,000. It’s  based on potential slippage for a USD 5,000 swap while also considering market depth within 1% of the current price. For instance, a 1% slippage implies that the market price will shift by 1% after executing a USD 5,000 swap. Meanwhile, a market depth of USD 10,000 suggests that executing a USD 10,000 swap would result in a 1% price shift.

This approach is essential as it filters out pools with minimal trading activity, ensuring that the report’s insights are based on meaningful data. The report ranks assets higher if they exhibit greater liquidity around the current market price. Therefore, higher market depth and lower slippage are indicators of a more liquid asset.

Empirica’s Contribution to the Crypto Community

By sharing our comprehensive research, we empower traders, investors, and token projects with valuable insights. This report not only helps traders make informed decisions but also aids token projects in understanding the importance of liquidity and market depth in attracting investors.

TOP 500 Most Liquid Token on Uniswap v3 – see the recent update of our report, where you can find liquidity metrics like slippage or market depth -> https://empirica.io/uniswap-liquidity-report/

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