Price impact explains why a swap may return fewer tokens or less value than expected. It happens when your trade changes the market price as it executes.
Price impact is the change in a token's price caused by your own trade. The larger your trade is relative to the available liquidity, the more it can push the price against you and reduce the amount you receive.
Why price impact happens
Price impact is usually higher in these situations:
- Large trades move the market more, especially in smaller pools.
- Low liquidity means there is less depth available to fill your order at a stable price.
- Volatile tokens can change price quickly, even during smaller trades.
Even if a token's market price is rising, a swap can still return fewer tokens than quoted if the pool cannot support the size of your order without moving the price.
Price impact vs. slippage tolerance
These terms are related, but they are not the same:
- Price impact is the actual price change caused by your trade as it moves through the pool.
- Slippage tolerance is the maximum difference you're willing to accept between the quoted price and the final execution price.
If price impact exceeds your slippage tolerance, the swap may fail instead of going through at a worse rate.
How to reduce price impact
You cannot avoid price impact completely, but you can reduce it in a few ways:
- Split large trades into smaller swaps.
- Trade in pools with deeper liquidity, which are usually the largest pools for that token pair.
- Review the quoted output and price impact before confirming the swap.
Real-world example
Suppose you're swapping $2,000 of a meme token in a pool with $10,000 in total liquidity. Because your trade makes up a large share of that pool, it could move the price significantly and return far fewer tokens than the original quote.
In a pool with $1,000,000 in liquidity, that same trade would usually have much less effect on the price.