Slippage in AMMs

Slippage is the difference between the expected price of a trade and the actual price at which the trade is executed, often caused by low liquidity. In automated market makers, every trade changes the ratio of assets in the pool, which directly shifts the price for the next participant.

Large trades relative to the pool's total size will cause significant price impact, resulting in poor execution for the trader. This is a fundamental challenge in DeFi, as users often face high slippage when trying to move large positions.

To mitigate this, traders use aggregators that split orders across multiple pools to find the best execution path. Understanding the mechanics of slippage is essential for any trader operating within decentralized exchange environments to ensure capital efficiency.