Understanding Slippage, Price Impact, and Liquidity Pools
When trading on decentralized exchanges, understanding slippage, price impact, and how liquidity pools work is essential to avoid costly mistakes.
What is Slippage?
Slippage is the difference between the expected price of a trade and the actual executed price. It occurs for two main reasons:
1. Price Movement (Market Slippage)
Between when you submit a transaction and when it executes, the market price may change:
You submit: Swap 1 ETH for USDC at $2,000/ETH
Block confirms 12 seconds later
Actual price: $1,995/ETH
Result: You receive $1,995 instead of $2,000 (0.25% slippage)2. Trade Size (Price Impact)
Your trade itself moves the price within the liquidity pool. This is distinct from market slippage.
What is Price Impact?
Price impact is how much your specific trade moves the pool’s price. Larger trades relative to pool liquidity have higher price impact.
How AMM Pricing Works
Most DEXs use the constant product formula: x * y = k
Pool State: 100 ETH × 200,000 USDC = 20,000,000 (k)
Spot Price: 200,000 / 100 = $2,000/ETH
You buy 10 ETH:
├─ New ETH: 100 - 10 = 90 ETH
├─ Required USDC: 20,000,000 / 90 = 222,222 USDC
├─ You pay: 222,222 - 200,000 = 22,222 USDC
├─ Effective price: 22,222 / 10 = $2,222/ETH
└─ Price impact: 11.1%Price Impact by Trade Size
| Trade Size (% of pool) | Approximate Price Impact |
|---|---|
| 0.1% | ~0.2% |
| 1% | ~2% |
| 5% | ~10% |
| 10% | ~22% |
What is a Liquidity Pool?
A liquidity pool is a smart contract holding reserves of two (or more) tokens that traders can swap against.
How Liquidity Pools Work
- Liquidity Providers (LPs) deposit equal values of both tokens
- Traders swap against the pool, paying a fee (typically 0.3%)
- LPs earn a share of trading fees proportional to their contribution
Pool: ETH/USDC
├─ Total Liquidity: $10,000,000
├─ Your Deposit: $10,000 (0.1% of pool)
├─ Daily Volume: $1,000,000
├─ Daily Fees (0.3%): $3,000
└─ Your Daily Earnings: $3 (0.1% of $3,000)Concentrated Liquidity (Uniswap V3)
Some DEXs allow LPs to concentrate liquidity in specific price ranges:
Traditional Pool: Liquidity spread $0 to ∞
Concentrated: Liquidity focused $1,800-$2,200
Benefit: Higher fee earnings when price stays in range
Risk: Earn nothing if price moves outside rangeSetting Slippage Tolerance
Most DEX interfaces let you set slippage tolerance—the maximum acceptable deviation from quoted price.
Recommended Settings
| Token Type | Suggested Slippage |
|---|---|
| Major pairs (ETH/USDC) | 0.1% - 0.5% |
| Altcoins | 0.5% - 1% |
| Low liquidity tokens | 1% - 3% |
| Tokens with transfer taxes | 5% - 15% |
Trade-offs
Low Slippage (0.1%):
├─ Pro: Get close to quoted price
└─ Con: Transaction may fail if price moves
High Slippage (5%):
├─ Pro: Transaction will succeed
└─ Con: May receive much less than expectedImpermanent Loss
When you provide liquidity, you’re exposed to impermanent loss if token prices diverge.
Example
Initial deposit: 1 ETH + $2,000 USDC ($4,000 total)
ETH price doubles to $4,000:
├─ If you held: 1 ETH ($4,000) + $2,000 = $6,000
├─ As LP: ~0.71 ETH ($2,828) + $2,828 = $5,656
└─ Impermanent Loss: $344 (5.7%)The loss is “impermanent” because if prices return to original levels, the loss disappears.
IL by Price Change
| Price Change | Impermanent Loss |
|---|---|
| 1.25x | 0.6% |
| 1.5x | 2.0% |
| 2x | 5.7% |
| 3x | 13.4% |
| 5x | 25.5% |
Finding Pool Liquidity
Before trading, check pool liquidity to estimate price impact:
Tools
- DEX Interfaces - Show liquidity on trade screen
- DeFiLlama - TVL rankings for protocols and pools
- Dexscreener - Real-time pool analytics
- GeckoTerminal - Pool liquidity and volume data
What to Look For
Good Liquidity:
├─ Pool TVL: $10M+
├─ 24h Volume: $1M+
└─ Your trade: <1% of pool → Low impact
Caution:
├─ Pool TVL: <$100K
├─ 24h Volume: <$10K
└─ Your trade: >5% of pool → High impactProtecting Yourself
Before Trading
- Check liquidity - Use Dexscreener or DeFiLlama
- Compare routes - Aggregators like 1inch find better prices
- Split large orders - Break into smaller trades over time
- Use limit orders - Some DEXs support them (1inch Fusion, CowSwap)
Transaction Settings
- Set appropriate slippage - Match token volatility
- Set deadlines - Prevent stale transactions
- Review price impact - Shown on most DEX UIs
- Use private mempools - Flashbots Protect, MEV Blocker
See It on Ramaris
Ramaris trade charts show actual executed prices as entry and exit markers on a candlestick chart. When reviewing wallet activity, you can see how price moved around each trade — including any slippage or price impact that occurred. Share interesting examples to illustrate these concepts with others.