What Is Price impact?
Price impact is the difference between the current market price and the price you will actually pay when performing a swap on a decentralised exchange.
Price impact tells how much less your market taker order gets filled because there is not available liquidity. For example, if you are trying to buy 5000 USD worth of BNB token, but there isn’t available liquidity you end up with 4980 USD worth of token at the end of the trade when you pay 5000 USD. The missing fill is the price impact. It can be expressed as USD value or as percent of the trade amount.
Illiquid pairs have more price impact than liquid pairs.
Liquidity provider fees are included in the price impact in AMM models.
Another way to see this: AMMs usually have a trading fee, of 0.30%, for liquidity providers and sometimes for the protocol. This translates to a spread of 0.6% between the best buy order and the best sell order. In other words, even the most liquid AMM trade has an implicit 0.3% price impact. Note that due to competition, the LP fees are going down on newer AMMs.
See also XY liquidity model.
See also Slippage.