Overview
Price impact is the effect a trade has on the pool price, larger for bigger trades relative to liquidity. It represents the cost of moving the price. It is a key component of trading costs in AMMs.
How It Works
A large trade changes the pool ratio significantly, so the average execution price differs from the initial price. The difference is price impact. Deeper liquidity reduces impact.
Why It Matters
Price impact determines the real cost of large orders. It is a major reason to use aggregators or deep-liquidity venues. Understanding it helps traders size positions.
Related Concepts
Price impact relates to Slippage, Liquidity Pools, and DEX Aggregators. It is a cost of large trades.