How Does a Decentralized Exchange’s Automated Market Maker (AMM) Model Handle Slippage Differently than a Traditional Order Book?

In an AMM, the price is determined by a mathematical formula based on the ratio of assets in the liquidity pool, not by limit orders. Slippage occurs when a trade significantly changes this ratio, resulting in a worse execution price for large trades.

The cost is often expressed as a combination of a trading fee and the price impact on the pool, rather than crossing a defined bid-offer spread.