# Price Impact and Slippage

## Price Impact and Slippage

When swapping tokens in DeFi,\
the **expected output** and **actual received amount** can differ.

This difference is caused by **Price Impact** and **Slippage** —\
two critical concepts you must understand to **minimize losses and trade efficiently**.

### 1️⃣ What Is Price Impact?

#### Definition

**Price Impact** refers to the **change in token price** during a swap,\
which causes you to receive **fewer tokens** than expected.

#### Why It Happens

In a **Decentralized Exchange (DEX)**, trades follow the\
**Automated Market Maker (AMM)** formula:

> A\_token\_amount × B\_token\_amount = Constant (k)

When someone trades, the pool ratio shifts,\
and the **price automatically adjusts**, affecting subsequent trades.

#### Example

Imagine a pool with A = 10 tokens and B = 100 tokens.\
Initially, 1 A = 10 B.

If you swap 5 A for B, you might expect 50 B —\
but in reality, you’ll get **around 33 B**.

As you add A into the pool, its price relative to B changes upward,\
reducing the amount of B you can receive.

> This difference is known as **Price Impact** —\
> the loss due to pool ratio adjustment.

#### More Liquidity = Less Impact

If another DEX has a much larger pool (A = 1,000 / B = 10,000),\
swapping the same 5 A will yield **nearly 50 B**,\
since the ratio shift is minimal.

> ✅ **Conclusion:**
>
> * Larger liquidity = smaller price movement
> * Trading large amounts in small pools increases loss

***

### 2️⃣ What Is Slippage?

#### Definition

**Slippage** is the **difference between the expected and actual execution price** of a trade.

For example, you click “Swap” expecting to receive **33 B**,\
but before your transaction confirms, another user trades,\
and the pool price shifts — now you only get **16 B**.

That difference is **Slippage**.

#### Why Set Slippage Tolerance?

DEXs allow users to set **slippage tolerance (%)** —\
the maximum deviation you’re willing to accept.

| Situation              | Recommended Setting           |
| ---------------------- | ----------------------------- |
| Highly volatile trades | Higher (to ensure execution)  |
| Regular swaps          | Lower (to prevent overpaying) |

If price movement exceeds your slippage setting,\
the swap **automatically fails** (you only lose a small gas fee).

> ⚠️ **Tip:**
>
> * Too low = failed transactions
> * Too high = risk of poor trade execution

***

### 3️⃣ Price Impact vs Slippage

| Term             | Description                                                      |
| ---------------- | ---------------------------------------------------------------- |
| **Price Impact** | Loss due to **pool ratio change** during the swap                |
| **Slippage**     | Loss due to **market movement between submission and execution** |

### Practical Tips

* Swap in **high-liquidity pools** → less price impact
* Compare **multiple DEXs** → better output rates
* Always check your **slippage tolerance** → prevent failed or costly trades
* Even **0.1% differences compound** over time — pay attention to details

> DeFi swapping seems simple — but small differences create major outcomes.\
> Understanding **Price Impact** and **Slippage** lets you trade **smarter and safer**.


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