Price Impact
Web3 / defi
The change in asset price caused by a trade itself, resulting from the trader consuming available liquidity in an order book or AMM pool. In AMM-based DEXes, price impact is determined by the ratio of trade size to pool liquidity—large trades relative to pool size move the price significantly along the AMM's pricing curve, meaning the trader receives progressively worse average execution prices the larger their trade. Price impact is distinct from slippage tolerance (the maximum accepted deviation from expected price) but related to it—high price impact causes high realized slippage. For large traders, minimizing price impact requires either trading in smaller tranches over time, accessing deep OTC liquidity, or using DEX aggregators that split trades across multiple pools. Price impact becomes especially problematic in low-liquidity tokens where even modest buy or sell orders move prices by 5-20%. Example: Attempting to buy $100,000 of a token with only $200,000 total liquidity in its main Uniswap pool would incur roughly 20-40% price impact—meaning the average purchase price would be 20-40% above the pre-trade price, representing a significant immediate loss. Why it matters for Web3: Price impact is the invisible cost that makes large DeFi trades expensive and creates frontrunning opportunities for MEV bots. Understanding price impact is essential for traders executing above trivial size and for protocol designers structuring liquidity incentives.
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