Price Impact
Price impact is the change in market price caused directly by the size of a trade relative to available liquidity.
✦ Key Insight
Large trades in shallow markets can significantly move the price against the trader. Understanding price impact helps traders avoid poor execution, especially on decentralised exchanges and low-liquidity tokens.
✕ Common Misconceptions
Confusing price impact with slippage
Trading large size through shallow pools
Ignoring aggregator routing
Assuming the displayed spot price applies to the entire order
Chasing low-liquidity tokens with market orders
Detailed Explanation
How It Works
Suppose a liquidity pool contains limited token reserves.
A small swap removes only a small percentage of the pool and causes limited price impact.
A large swap removes much more liquidity, forcing the AMM price to change significantly during execution.
FAQs
Is price impact the same as slippage?
No. Price impact is caused by your own trade size, while slippage includes broader price movement during execution.
Can price impact be reduced?
Often by reducing trade size or using deeper liquidity.
Do centralised exchanges have price impact?
Yes, through order-book depth.
In Practice
Dig Deeper
Slippage
Slippage is the difference between the price a trader expects when submitting an order and the actual price at which the trade executes. Slippage is common in crypto markets and is usually more noticeable during high volatility or when trading low-liquidity tokens.
Liquidity Pool
A liquidity pool is a collection of crypto assets locked in a smart contract that allows users to trade tokens on decentralized exchanges without relying on a traditional order book.