Slippage vs price impact

Price impact is the change in price that your own trade causes. Slippage is the difference between the price you expected and the price you got, because the market moved before your trade went through. Both make a trade cost more than the screen first suggested.

Side by side

Price impact, with numbers

On a decentralised exchange you trade with a pool of two tokens, and the price comes from their ratio.

Take a pool with 10 ETH and 40,000 USDC. The price is 4,000 USDC per ETH. If you buy 1 ETH, the pool is left with 9 ETH, and the rule that sets the price means you pay about 4,444 USDC.

You paid 11% more than the starting price, because your own trade moved it. In a pool a thousand times larger, the same purchase would barely move it.

Slippage

Between the moment you press the button and the moment your trade is confirmed, other trades can change the price.

A decentralised exchange lets you set a slippage tolerance. If the price moves against you by more than that, the swap fails instead of going through at a bad price. A failed swap still costs the network fee.

Setting the tolerance high is risky. Pending swaps are visible to everyone, and automated traders look for large ones with loose settings. They buy just before the swap and sell just after it, at the swapper's expense.

On a centralised exchange

The same idea applies to market orders. In a fast market, or with a thinly traded coin, a market order can fill at a worse price than the one you saw. A limit order avoids that by naming your price.