What is price impact?
The difference between the quoted price and the price you actually get, caused by your own order consuming the liquidity available.
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In this entry
The difference between the quoted price and the price you actually get, caused by your own order consuming the liquidity available.
Decentralized exchange screens show it as a percentage before you confirm. High impact on a small order is a warning that the pool or book is thin.
Price impact is often confused with slippage, and the distinction is worth keeping. Impact is what your own order does to the price: it is deterministic, visible before you trade, and it grows with size. Slippage is what other people's activity does between your click and your fill. One you cause, the other happens to you.
How it works
On an order book, a market buy takes the cheapest offer, then the next, then the next, until it is filled. Your average price is the weighted average of every level you consumed, so it is always worse than the best quote unless the top level alone covers you. See order book and market depth.
On an automated market maker, there is no book. A constant-product pool prices each unit as a function of the reserves, so buying moves the ratio and every subsequent unit costs more within the same transaction. The formula is public, which is why decentralized exchange interfaces can display the exact impact before you sign. See liquidity pool and concentrated liquidity.
Either way the driver is your size relative to available depth, not the asset's popularity in the abstract. A large order in a deep market has less impact than a small order in a thin one.
Example
Illustrative order book for a token quoted at $1.00.
| Level | Price | Size available | Running cost |
|---|---|---|---|
| 1 | $1.000 | 2,000 tokens | $2,000 |
| 2 | $1.010 | 3,000 tokens | $5,030 |
| 3 | $1.035 | 5,000 tokens | $10,205 |
Illustrative book depth; real books have far more levels.
Buy 10,000 tokens and you pay $10,205, an average of $1.0205 against a $1.00 quote. That is 2.05% price impact, or $205 on a $10,000 trade. Buy 2,000 tokens instead and you pay $2,000 flat, with no impact at all. Nothing about the token changed between those two orders; only your size did.
Why it matters when you buy
Price impact is a real cost that never appears on a fee schedule, and on thin assets it can dwarf the commission. Comparing venues on fees alone will mislead you if one has a tenth of the depth. RampAtlas measures resting depth and the slippage a given order size would pay, which is what the liquidity pages publish, and the fee comparison covers the visible half of the cost.
Related terms
slippage — movement between click and fill; market depth — how much rests near the price; liquidity — the underlying condition; automated market maker — where impact is formulaic; order book — where impact is level by level; slippage tolerance — the limit you set before signing.
Questions
Is price impact the same as slippage?
No. Impact is caused by your own order size against known depth and is visible before you confirm. Slippage is caused by other activity arriving between submission and execution. Both worsen your fill, for different reasons.
How do I reduce it?
Trade smaller, split the order over time, or use a venue with more depth in that specific pair. A limit order avoids impact entirely by refusing to pay above your price, at the cost of possibly not filling.
Why does a decentralized exchange show impact but my exchange app does not?
A pool's pricing formula is public, so the interface can compute your fill exactly. Simple exchange buy screens often fold the same cost into a quoted rate or spread instead of naming it, which does not mean you are not paying it.