Swapping tokens is a routine process for crypto users, but sometimes you might receive fewer tokens than expected after a swap. This is likely due to price impact, a common phenomenon in markets with low liquidity or during large trades. Let’s dive deeper into what price impact is, why it happens, and how you can manage it effectively.
What is Price Impact?
Price impact refers to the effect your trade has on the market price of a token. When a large trade is executed, the market price can shift as the trade consumes available liquidity across multiple price points. This can lead to you receiving fewer tokens than expected. Price impact is especially noticeable in low-liquidity markets, where even smaller trades can significantly affect token prices.
What Causes Price Impact?
Price impact is influenced by several key factors:
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Trade Size:
Larger trades consume more of the available liquidity in the pool, which affects the market price more significantly. -
Market Liquidity:
Low-liquidity markets have fewer tokens available for trading. This makes them more sensitive to the effects of individual trades, even smaller ones. -
Token Pair Volatility:
Tokens with high volatility or low trading volumes are more prone to price impact, as their prices can shift rapidly during trades.
What is Slippage Tolerance, and How Does It Relate to Price Impact?
Slippage tolerance is the maximum acceptable price deviation during a trade. While slippage settings can help manage price fluctuations, price impact overrides slippage tolerance if the trade significantly affects the token price.
Can Price Impact Be Avoided Completely?
Price impact cannot be completely avoided, especially in low-liquidity markets. However, its effects can be mitigated by:
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Swap Smaller Amounts:
Breaking larger trades into smaller transactions reduces the strain on market liquidity and minimizes the effect on token prices. -
Trade During High Liquidity:
Execute your trades during peak market activity or when the liquidity pool for your token pair is at its highest. -
Monitor Token Liquidity:
Check the liquidity pool of your token pair before initiating a trade. This gives you a better understanding of how much price impact your transaction might have. -
Adjust Slippage Tolerance:
If necessary, adjust the slippage tolerance in your wallet settings. This allows more flexibility in price movement, ensuring the trade is executed. However, be cautious—higher slippage increases the risk of receiving a less favorable exchange rate.
Is Price Impact the Same as Transaction Fees?
No, price impact and transaction fees are distinct concepts:
- Price Impact: Refers to the change in token price caused by your trade size relative to market liquidity.
- Transaction Fees: These are network fees paid to validate and process the transaction. For example, on Solana, transaction fees are typically very low (~0.000005 SOL).
Why Does Price Impact Matter for Smaller Trades?
While price impact is more pronounced for large trades, smaller trades can also be affected in low-liquidity markets. Even minor transactions can cause price shifts if the market lacks sufficient depth. Always check liquidity details and review swap estimates to avoid surprises.
Key Takeaway
Always review swap details and warnings in Phantom Wallet to stay informed and make smarter trading decisions. If none of the above steps resolve the issue, unfortunately, there is nothing further that can be done to swap the tokens. In this case, you may have to consider the tokens lost.