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This section serves as a brief overview of the Price Impact. The Price Impact is the influence of user's individual trade over the market price of an underlying asset pair. It is directly correlated with the amount of liquidity in the pool / Automated Market Maker (AMM). Price impact can be especially high for illiquid markets/pairs, and may cause a trader to lose a significant portion of their funds.
Here is an extreme example of an illiquid swap that would have a negative price impact:
If the user in this example were to continue with the swap, they would be trading $164,308 worth of ETH for $68,661 worth of DIP. This is because there are not enough sellers of DIP at the current market price to fulfill an order of this size. Put figuratively, the one single large trade would make a big splash in the small pool.
Price impact can also be positive too! If the pool is imbalanced in the opposite direction, your trade might take place at a discount relative to the pool. This is also known as an arbitrage opportunity.
What is the difference between Price Impact and Price Slippage?
Price impact and price slippage are very similar; however, there is a nuance.
Price slippage refers to the change in price caused by external broad market movements (unrelated to your trade), while price impact refers to the change in price directly caused by your own trade itself.
Like price impact, slippage is also highly dependent upon the liquidity in a pool. If the token pair as a low amount of liquidity, it takes smaller collective market movements to cause significant changes to the pool's rate.
Slippage can be positive as well. If the rate changes in a favorable direction, a surplus amount of tokens is returned for the swap.
How to minimize negative price impact
To manually reduce the price impact of a swap, you can reduce the amount swapped, or wait for more liquidity to enter the market. For many "less reputable projects" or scam tokens, this liquidity will never show up. Also, it is strongly recommended to confirm that the amount of tokens in the "You Receive" section is the correct amount of tokens for the current market rate.
