1. What is price impact?
2. How are price impact and slippage different?
3. How to minimize the price impact?

What is price impact?

Price impact is the effect of individual user transactions on the market price of a pair of assets in the pool. It is directly related to the liquidity of the asset pair in the pool/Automated Market Maker (AMM). The price impact can be especially high for illiquid markets/asset pairs and can cause traders to lose a significant amouny of their money when trading.

For example, when swapping 100 USDT to BNB, you will see the market price of 350.61 USDT/BNB.

When increasing the amount to 100,000 USDT, the market price is 399.84 USDT/BNB.

Thus, when buying 100,000 USDT or more, your trade has made the market price 12.29% worse than the normal price. That is the price impact.

How are price impact and slippage different?

Price impact and price slippage are quite similar; However, there is one difference.

Slippage is a price change caused by external market movements (not related to your trade), while price impact is a direct price change caused by your trade itself.

Similar to price impact, slippage is also highly dependent on the liquidity of the pool. If the token pair has low liquidity, then a set of small market fluctuations can also cause significant changes to the pool's rate.

How to minimize Price Impact?

Split Transaction or Reduce Transaction Amount

Sometimes some cryptocurrencies can be bought in very small quantities because their prices are very low or the exchange allows it. Even so, if the pool's liquidity is not large enough, the price impact mechanism can cause problems for large transactions.

-> To solve this problem, you can split into many small transactions or reduce the number of each transaction.

Choose an exchange with good liquidity

You can choose an exchange with better liquidity to trade.

The tip is that for many "bad projects" or scam tokens, the liquidity will never show. Also, you should make sure that the number of tokens you receive is the correct number of tokens at the current market rate.

Changing the slippage percentage (slippage tolerance)

Changing the slippage percentage to complete a trade can be the solution to high price impact. When experiencing extreme price volatility and lengthy buying or selling on decentralized exchanges, an increase in slippage will help complete the transaction.

Using Limit orders

Using limit orders ensures you get the selling/buying price you expect – or even better. Limit orders may take time to be completed. But they guarantee you won't suffer any negative slippage.

There are other simple solutions that traders can use such as; make sure you have high speed internet or change your device. In addition, changing the browser application can sometimes solve the problem of overpriced price impact.

Thank you for always following and supporting the articles on Remitano Forum. We hope that the knowledge of crypto trading & investing from basic to advanced here will help you confidently to start trading and invest profitably from cryptocurrencies.

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