What is "Price Impact" in DeFi?
Last updated January 7, 2025
FAQ: What is "Price Impact" in DeFi?
Price Impact refers to the effect your trade has on the market price of the asset being traded.
When you execute a trade, especially in markets with low liquidity, the price of the asset may shift as a direct result of your transaction. It occurs when the size of your trade impacts the available liquidity in the market, causing the price to move against you.
For example: If you are buying a token and the trade consumes a large portion of the liquidity available in the market, the token price will increase, causing you to pay more for each unit. Similarly, selling a large amount can drive the price lower, reducing the value of your trade.
Why does price impact happen?
- Low Liquidity: If a token pool has limited liquidity, larger trades will consume a significant portion of the available supply, affecting the price.
- Trade Size: Larger trades have a greater chance of causing noticeable price shifts compared to smaller trades
High price impact can result in paying significantly more than expected or receiving much less when selling. Coins that are less liquid are more susceptible to price impact, as fewer tokens are available to accommodate large trades.
FAQ: How to manage "Price Impact" in your Rule?
On Coinrule, you can set a maximum price impact for any ACTION in the rule editor. This setting allows you to define the highest percentage change in price you are willing to accept as a result of your trade.
If you set a Max Price Impact of 1%, the trade will only proceed if the expected price change caused by your transaction remains within this 1% limit. If the trade would cause a price impact above this threshold, it will not be executed, protecting you from unexpected and unfavorable price shifts.
FAQ: What is the difference between "Slippage" and "Price Impact"?
While slippage accounts for market movements during transaction processing, price impact specifically addresses how your trade size influences the price. Managing both settings ensures you have control over market conditions and trade execution.
By setting a Max Price Impact in your Rule, you can trade more efficiently, particularly in low-liquidity markets, while minimizing the risk of significant price deviations caused by your own trade.