Price Impact

Price impact is the change in an asset’s price that is directly caused by your own trade. In practice, it shows up as the difference between the expected market price you see before submitting an order and the average price you actually receive when the trade executes. The larger your trade is compared with the available liquidity, the more the trade “moves” the market and the higher the price impact tends to be.

On exchanges, orders are filled against available liquidity. In traditional order book venues, liquidity comes from limit orders at different prices. A large market order can consume the best available quotes and then “walk the book,” filling at progressively worse prices. The result is a worse average execution price than the top-of-book price you first observed, which is the core of price impact.

In DeFi automated market makers (AMMs), price impact is built into the pool’s pricing curve. When you swap token A for token B, you change the pool’s token balances, which shifts the quoted rate for the next trade. If the pool is small or your swap is large, that balance shift is bigger, so the effective exchange rate deteriorates more noticeably during your trade.

Price impact is often confused with slippage. Price impact describes the price movement caused by your order itself, while slippage is the gap between expected and executed price for any reason, including volatility, latency, and other traders updating the market. Traders manage both by using limit orders where possible, splitting large trades, choosing deeper liquidity venues, or setting slippage tolerance on DeFi swaps.