Why the Price You See Isn't the Price You Get: Slippage and Price Impact in Plain English
A 0% platform fee does not mean $100 buys $100 of assets. Here is what slippage, price impact and pool fees are, a labeled worked example, and how I handle them on Wealtii. Put $100 into a fund that charges 0% and you might end up holding $99.60 of assets. Nobody took the 40 cents. There was no fee line for it. It disappeared in the gap between the price you were quoted and the price the market…
"Slippage and price impact" are two terms used to describe the difference between the expected price and the actual price of an asset when buying or selling on a decentralized exchange. These factors are crucial to understand, as they can significantly impact the final amount of assets you receive.
When you invest $100 in a fee-free fund, you may end up with only $99.60 worth of assets due to slippage and price impact. These costs are not fees charged by the platform but rather the result of market dynamics. Slippage refers to the difference between the expected price and the price at which the trade is executed, while price impact is the effect your trade has on the market price.
On-chain purchases involve several steps that contribute to these costs. First, the order is split across the fund's holdings by their target weights. Then, each holding is bought on a decentralized exchange through an aggregator that searches for the best available quote. The tokens are deposited into the fund's vault, and you receive units representing your share.
Three factors affect the final price: the pool fee, price impact, and slippage. The pool fee is a small charge imposed by decentralized exchanges on every trade and is built into the quote. The price impact occurs when buying from a pool, which pushes the price slightly upward as tokens are taken out. Slippage is the variation in price between the moment the trade is quoted and the moment it is processed, caused by other market participants' trades.
Written by urgent.news from Dev.to's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
