How Does the ‘Slippage’ in a Trade on a Decentralized Exchange Relate to the Size of the Liquidity Pool?

Slippage on a decentralized exchange is directly related to the size of the liquidity pool. Slippage is the difference between the expected price of a trade and the price at which it is actually executed.

In a small liquidity pool, a large trade can have a significant price impact, causing the execution price to be much worse than the expected price. This is because the trade is consuming a large portion of the available liquidity.

In a large liquidity pool, the same trade will have a much smaller price impact, resulting in less slippage. Therefore, the larger the liquidity pool, the lower the slippage for a given trade size.