What Is Price Impact?
Price impact is the change in an asset's price caused by executing a trade. A $1,000 market buy might move BTC by $0.01, but a $100M market buy would move it substantially. Price impact is determined by the relationship between your order size and the available liquidity — trading into thin order books or shallow DEX pools creates larger price impact.
How Price Impact Works
On AMM-based DEXs, price impact is mathematically deterministic: the constant product formula (x × y = k) means larger swaps result in exponentially worse execution. A $10,000 swap might have 0.1% impact, but a $100,000 swap in the same pool might have 2% impact. DEXs display projected price impact before execution, giving traders a clear view of the cost.
Why It Matters for Traders
Price impact is a hidden cost that goes beyond visible fees and spread. A strategy that appears profitable on paper might be unprofitable once realistic price impact is factored in. For large orders, using TWAP (breaking the order into smaller pieces over time), limit orders, or DEX aggregators minimizes price impact by spreading the order across multiple venues and time periods.
