Definition
Price impact is a trading concept that describes how much the execution price of an asset moves as a direct result of placing a specific order. It reflects the interaction between the trade size and the depth of liquidity available at current prices. In crypto markets, especially on a DEX, larger trades relative to the liquidity pool tend to cause higher price impact. This effect is distinct from general market volatility because it is driven by the trade itself rather than external price movements.
On AMM-based platforms, price impact arises from the way the pricing curve adjusts token ratios inside a liquidity pool when a trade is executed. The more a trade shifts the balance of tokens in the pool, the more the quoted price moves against the trader, increasing price impact. Centralized or order-book markets exhibit a similar concept, where consuming multiple price levels to fill an order leads to a worse average execution price. Price impact is often discussed alongside slippage, which captures the difference between the expected price and the final execution price.
Context and Usage
In DeFi, price impact is a key consideration when trading through an AMM or any DEX that sources liquidity from a finite pool. Interfaces commonly display an estimated price impact percentage to indicate how much the trade will move the pool’s price relative to the current quote. High price impact usually signals that the trade size is large compared with the liquidity pool, or that the pool itself is shallow. This concept helps traders understand how their own orders can materially affect on-chain prices.
Price impact is closely related to slippage, but focuses on the structural effect of order size on pricing rather than incidental market movements. It is inherently tied to liquidity conditions: deeper pools and tighter markets generally exhibit lower price impact for the same trade size. In practice, price impact serves as a metric for how efficiently a market or pool can absorb trades without significantly altering the asset’s price. As such, it is a core concept in evaluating the quality of execution on AMM-based and other decentralized trading venues.