Price impact

How it is calculated

Price impact is the percentage change between the pre-trade and post-trade price. It is related to slippage but distinct: slippage is the gap for the trader, price impact is the market-level effect everyone else sees afterward. In a thin pool, a large trade carries both at once.

In a constant-product AMM, price impact for a buy of size delta_x into a pool with reserve x is roughly 2 times delta_x divided by x for small trades; the full formula applies for large ones. A $10K buy in a $100K pool has the same percentage impact as a $1M buy in a $10M pool.

Design consequence

Price impact is the right tool for setting the pool's capacity ceiling. Define the maximum acceptable impact for the largest expected trade, derive the required reserve from that constraint, and confirm the treasury can seed it. If the largest expected trade is $100K and acceptable impact is 5%, the pool needs at least $2M in reserves. That is the minimum viable pool for this spec.

Example

A project targeting institutional buyers who transact in $500K-$1M lots needs a pool with $10M-$20M in reserves to keep price impact under 5% per trade. Seed a $500K pool with that buyer profile and every institutional transaction moves price 10-20%, creating adverse selection and driving professional capital to other venues.

Common mistake

Teams design the pool for retail trade sizes when the strategy includes institutional participants, or the reverse. Impact curves are asymmetric: small trades barely register, large trades move price disproportionately. Skipping the impact chart leaves the team blind to the segment that causes the most disruption.