Slippage and Market Depth

Slippage and market depth are fundamental concepts in market microstructure that define the efficiency of trading on a decentralized exchange. Slippage is the difference between the expected price of a trade and the price at which the trade is executed, often caused by low liquidity.

Market depth refers to the amount of liquidity available at various price levels, with greater depth resulting in lower slippage for large orders. Protocols strive to maintain deep liquidity to provide a seamless and efficient trading experience for users.

Understanding these concepts is vital for traders to manage execution risk and for protocols to attract volume. They are core metrics for evaluating the quality of an automated market maker and its competitive standing.