Clear DefinitionsPrice Impact
1 min read
Pronunciation
[prys im-pakt]
Analogy
Like pushing a boat in shallow water—you create waves that shift its position more than in deep water.
Definition
The effect a trade has on the market price of an asset, measured as the difference between expected execution price and pre‑trade mid‑price, often due to liquidity consumption.
Key Points Intro
Price impact quantifies slippage incurred by executing a trade in a given order book or AMM.
Key Points
Slippage: Difference between estimated and actual execution price.
Liquidity depth: Deeper books reduce impact for a given trade size.
AMM curves: Constant product formulas amplify impact for large swaps.
Mitigation: Split large orders or use limit orders.
Example
Selling 50 ETH in a thin DEX pool moves the price down 2% due to shallow liquidity.
Technical Deep Dive
In AMMs, impact = 1 − (x/(x + Δx))^k where k = reserve ratio exponent. In order books, impact computed by summing depth until order size is filled.
Caveat
Neglecting impact models can lead to underestimating execution cost.
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