How Does Transaction Slippage Affect the Profitability of Arbitrage in a Liquidity Pool?

Slippage is the difference between the expected price of a trade and the price at which the trade is executed. As an arbitrageur executes a trade, their action itself moves the pool's price closer to the external market price.

High slippage reduces the profit margin, and if the slippage is too high, the arbitrage trade becomes unprofitable or even results in a loss, especially in pools with low liquidity.