How Does a Decentralized Exchange’s Liquidity Affect the Effectiveness of a TWAP Oracle?

A DEX with low liquidity is highly susceptible to price manipulation with a small trade, making a simple spot price oracle unreliable. A TWAP oracle is more effective in this environment because it averages the manipulated price with prior, unmanipulated prices, mitigating the impact.

However, if the averaging period is too short, or if the DEX is the only source, the TWAP's effectiveness is limited.