How Does ‘Slippage’ Occur on an AMM?
Slippage occurs when a large trade significantly changes the ratio of assets in the liquidity pool, causing the price received by the trader to be worse than the expected price. Since the constant product formula must hold, a large removal of one asset necessitates a disproportionate price change to maintain the constant k.
Glossar
Constant Product Formula
Formula ⎊ The Constant Product Formula, a cornerstone of Automated Market Makers (AMMs) like Uniswap, dictates the relationship between the reserves of two tokens within a liquidity pool.
Liquidity
Trading Capacity ⎊ Liquidity describes the ease with which an asset can be bought or sold in large quantities without substantially affecting its market price, measured by volume, bid-ask spread, and order book depth.
Low Liquidity
Impedance ⎊ Low liquidity within cryptocurrency, options, and derivatives markets signifies a diminished capacity of market participants to execute substantial trade volumes without causing significant price impact.
Disproportionate Price Change
Deviation ⎊ A Disproportionate Price Change refers to a rapid, significant movement in an asset's price that significantly exceeds expected volatility parameters or established historical correlation with related instruments.