Price impact is the change in a market’s price caused by a trade itself. A purchase or sale consumes available liquidity, so its size relative to that liquidity affects the prices at which it can execute.
Order books and liquidity pools
In an order book, a large buy may exhaust the cheapest available sell orders and continue at higher prices. Its average execution price can therefore be worse than the best initial quote. A large sale can have the opposite directional effect.
In an automated market maker, trading changes the pool’s balances and its quoted exchange rate under the pricing rule. Concentrated liquidity means that the amount available near the current price matters; total pool value alone is not enough to judge impact.
Impact versus slippage
An application’s quote may already account for the expected impact of the proposed trade. Slippage then describes an additional difference between the quote and execution, for example because other trades occur first. Terminology and measurement methods can vary, so the displayed reference price matters.
Smaller trades or deeper liquidity can reduce immediate impact, but splitting orders adds timing and execution risks and may incur additional costs. Raising slippage tolerance does not reverse price impact. A displayed estimate is also not a guarantee of the final result.