Computing slippage instead of guessing it
Price impact, slippage tolerance and market depth are routinely confused — they measure three different things.
This lesson has had no expert review. It was written for this platform and against the evidence it cites; nobody has gone through it independently.
Learning objectives
- You can tell price impact and slippage tolerance apart.
- You can estimate what amount moves a pool by a given percentage.
Check your prior knowledge
Answer these for yourself before reading on. Wherever you hesitate is where this lesson pays off.
- Why does an order in an AMM move the price?
- What exactly does a slippage tolerance set?
- What determines how strongly an order acts?
Core concept
Price impact is mechanical, slippage tolerance is a limit
Price impact follows from order size relative to the balance: it can be computed before execution. Slippage tolerance, by contrast, is an upper limit the user sets — the transaction fails if the outcome is worse. A high tolerance does not make execution more expensive; it merely stops a bad rate from halting the order. Confusing the two mistakes a safeguard for a cost figure.
Depth depends on where you look
With evenly spread liquidity, price impact grows predictably with the share of the balance. With concentrated liquidity that holds only inside the chosen price range: depth is greater there and breaks off at its edge. A small order can therefore execute unremarkably while one twice its size meets an entirely different rate — with nothing having changed in TVL.
The figure that counts is the way back
On entry, price impact is usually accepted because it occurs once. On exit it occurs again — and typically in a market that has thinned, because others are doing the same. Computing only the entry looks at half the process and omits the worse half.
Definitions
- Price impact
- The price change an order causes through its own execution.
- Slippage tolerance
- The user-set upper limit on deviation within which an order may execute.
- Concentrated liquidity
- Liquidity a provider confines to a self-chosen price range.
Model
Market depth — a property of the pool
Price impact — a consequence of your order size, computable in advance
Slippage tolerance — a self-set limit, not a cost measure
Together: entry plus exit, not entry alone
Formulas
Price impact under constant product
Price impact ≈ order size / (pool balance of the other side + order size)- order size
- amount of the asset being given up
- pool balance
- the pool's balance of the other side
Limit: Holds for the classic case with evenly spread liquidity. With concentrated liquidity, effective depth at the current price is a different number from the balance, and the formula estimates too favorably.
Worked example
Computing entry and exit together
- Pool balance of the other side
- USD 9m
- Planned order
- USD 900,000
- Expected return over 12 months
- 6.0 %
Price impact per direction ≈ 0.9 / (9 + 0.9) ≈ 9.1 %. Round trip roughly 18 %, assuming unchanged depth.
The round trip costs a multiple of the annual return.
Reading: The return is irrelevant here: the position fails on size, not on yield. Either it gets much smaller, or it is built over several days — which puts execution risk in place of price risk.
Interactive model
The worked example, with movable figures. Estimate first what happens — then check.
Constant product and price impact
An order moves the pool along the curve x × y = k — the larger it is, the further from the spot price.
Estimate first, then check
Estimate first: how large may the order be against a USD 9m pool balance for price impact to stay below 1 % per direction? And what does the round trip cost then?
The starting values are the worked example's own figures — change one input at a time.
Price impact: 9.1%. Amount received: $818,182. Round trip (entry and exit): 17.4%.
What the model does not show: The round trip assumes unchanged depth at exit. A position built over days meets different reserves — and swaps price impact for execution risk, which this model does not show.
Retrieval
Exercise on real data
Pick a pool, read its TVL and compute price impact for 1 %, 5 % and 10 % of the balance. Record from which share the round trip exceeds an annual return.
Estimate price impact on a real pool →Application
A position is to be built over several days to reduce price impact. Which risk are you taking on instead?
Related case studies
Institutional reading
- Asset management
- Is round-trip price impact deducted from the expected return?
- Bank
- What haircut would the position carry into a reporting-date valuation?
Metrics in this lesson
Key takeaways
- Price impact is computable; slippage tolerance is a limit, not a cost measure.
- With concentrated liquidity, TVL says even less about effective depth.
- What gets computed is the round trip, not the entry.
Evidence
- EVD-2026-0008
DeFiLlama — DeFiLlama yields endpoint (/pools)