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Price ImpactĀ is affected by the size of your trade relative to the available liquidity within the pool. It is a function of the constant product formula, which is defined as:Ā xāy=kxāy=k.
In a traditional order-book model, you might have an asset that trades at $10. However, if a buyer with a large enough order comes around, he/she may take up all the offers to buy the asset at $10, $11 & $12. This will cause the average buying price on that asset to fall somewhere in between the range of $10 to $12 for that particular individual.
With an AMM (Automated Market Maker), the value of an asset is directly related to the balance of tokens in the pool. This balance is shifted during the swap, thus the final execution price will always fall somewhere in between.
A general rule to remember is that price impact will be aroundĀ twiceĀ the size of your order relative to the size of the pool.
Price ImpactĀ is affected by the size of your trade relative to the available liquidity within the pool. It is a function of the constant product formula, which is defined as:Ā xāy=kxāy=k.
In a traditional order-book model, you might have an asset that trades at $10. However, if a buyer with a large enough order comes around, he/she may take up all the offers to buy the asset at $10, $11 & $12. This will cause the average buying price on that asset to fall somewhere in between the range of $10 to $12 for that particular individual.
With an AMM (Automated Market Maker), the value of an asset is directly related to the balance of tokens in the pool. This balance is shifted during the swap, thus the final execution price will always fall somewhere in between.
A general rule to remember is that price impact will be aroundĀ twiceĀ the size of your order relative to the size of the pool.