What is Insufficient Liquidity on a DEX?

When you receive the "Insufficient liquidity for this trade" error on a Decentralized Exchange (DEX), it means that the liquidity pool does not have enough tokens to process your transaction as requested. This issue frequently arises with newly listed or less popular tokens, which have smaller liquidity pools.

The core problem occurs when the trade amount surpasses the pool's capacity, resulting in a price shift known as "slippage." Liquidity in this context refers to the availability of a specific token within a pool on a DEX, such as Uniswap. These pools are at the center of DEX functionality as they enable token exchanges through smart contracts. They are established by liquidity providers who deposit equal values of two different tokens to the pool, also called an Automated Market Maker (AMM).

How to Fix Insufficient Liquidity for this Trade Error

To resolve the "Insufficient liquidity for this trade" error on Decentralized Exchanges (DEX) across both Layer 1 and Layer 2 blockchains, consider the following strategies:

• Adjust Trade Size: Reduce the amount you are trading to fit the pool's available liquidity, minimizing the risk of a failed transaction.
• Modify Slippage Tolerance: Increase your slippage tolerance in the DEX settings to accommodate potential price variations during execution. Be cautious, as this may lead to less favorable trade conditions.
• Explore Alternative DEXes: Liquidity can differ significantly across platforms. If one DEX lacks sufficient liquidity, try another that might support your trade.
• Verify the Contract Address: Double-check the token's contract address to ensure you are trading the correct token, as many tokens share similar or identical names.
• Consider Intermediary Tokens: Use intermediary tokens to facilitate your transaction if the direct trading pair lacks liquidity.

These steps can help mitigate the error, which typically arises when a liquidity pool cannot support the requested trade size. Factors such as trade volume, token demand, and market availability influence this issue. Review your trade settings, especially slippage tolerance adjustments, as they directly affect transaction price and outcome.

What is Slippage?

Slippage is when the expected price of a trade is different from the actual price at which it is executed. This usually happens on decentralized exchanges because the market is unstable or there isn't enough liquidity. It happens more often with big trades or tokens that don't trade very often because the available liquidity can't handle the size of the trade without changing the price.

To manage slippage, traders can set a slippage tolerance, which cancels the trade if the price deviation exceeds a specified threshold, though increasing this tolerance might result in less favorable trade conditions.

Can Insufficient Liquidity occur on any DEX?

Insufficient liquidity can pop up on any decentralized exchange that uses liquidity pools for trading (all AMMs), even on big names like Uniswap on Ethereum, PancakeSwap on Binance Smart Chain, and Raydium on Solana. This problem often shows up when there aren't enough assets in the pool to handle a trade, which usually affects newer or less popular tokens with smaller liquidity pools.

No matter the platform, traders might run into insufficient liquidity if their trade size is too big for the pool's capacity or if the token doesn't have much demand. Interestingly, if you're trying to swap tokens using a crypto wallet like Trustwallet or Coinbase Wallet, you might also see a message about insufficient liquidity because these apps route your trade through the most efficient DEX, which might not always have enough liquidity. To explore the DEXes with the most active volume you can use DefiLlama.

How to Avoid Insufficient Liquidity Issues

To minimize the risk of facing insufficient liquidity when trading on DEXes, consider the following strategies:

• Research Liquidity Pools: Before trading, check the liquidity levels of the token pair you are interested in with a tool like DEX Screener and choose pairs with high liquidity.
• Monitor Market Conditions: Be aware of market volatility and trends, as they can affect liquidity availability. High volatility can lead to rapid price changes and slippage.
• Use Price Tracking Tools: Utilize platforms, such as Coingecko that provide real-time data on liquidity and trading volumes to identify the most liquid trading pairs and exchanges.
• Participate in Popular Pools: Engage with well-established tokens and liquidity pools with big trading volumes. These pools are less likely to encounter liquidity shortages.
• Plan Trades During Optimal Times: Execute trades during times of higher market activity when liquidity is generally more abundant, reducing the chance of encountering issues.

The image below shows an example on how to use DEX Screener for a dogwifhat pool. The WIF/SOL pair on the Solana DEX Orca has a liquidity of $2.4 million with a total volume of $78.6 million coming from 7.4 thousand makers across 64 thousand transactions.

Bottom Line

Managing the insufficient liquidity error on decentralized exchanges demands a strategic approach and a solid grasp of how liquidity pools function. Identifying the root causes—like trade size and available pool liquidity—can quickly illuminate the problem. Adjusting trade sizes, tweaking slippage tolerance, and exploring alternative exchanges or trading paths can help traders effectively tackle these issues.

DeFi fans can take additional proactive measures, such as researching liquidity levels, keeping an eye on market conditions, and using price-tracking tools, to boost trading efficiency and reduce risks. By implementing these strategies, traders can enjoy smoother trading experiences and achieve better outcomes on DEX platforms.