Blockchain & Digital Finance Lab

In recent years, we have seen the growth of decentralized finance (DeFi), an ecosystem of financial applications and protocols that enable complex, automated, permissionless financial transactions in blockchains (such as Ethereum). We examine decentralized exchanges (DEX), a key DeFi component that facilitates token swaps. DEX prices update continuously and automatically after each swap, creating price shifts for users as their swaps (trades) wait to execute. Users protect themselves from these price shifts by setting a slippage tolerance, which represents the maximum acceptable price increase. This setting is a double-edged sword: lenient tolerance can be exploited through sandwich attacks, which cost the ecosystem over $100 million annually, but stricter tolerance may cause unnecessary failures. We perform a large-scale measurement of the impact of slippage tolerance settings on the health of the Uniswap and Sushiswap DEX ecosystems. To this end, we examine a recent change in Uniswap’s default slippage setting, which aimed to mitigate sandwich attacks without increasing the likelihood of transaction failures. This change removed the prior, static default – 0.5% – in favor of one dynamically computed for each transaction based on market conditions so that sandwich attacks are less profitable. We find that, overall, Uniswap’s new default slippage setting leads to a substantial reduction in Uniswap traders’ losses, approximately 54.7%. The effect is even more pronounced 90% when we only consider traders who followed the default settings.