Slippage
The difference between the expected price of a trade and the actual executed price. Slippage occurs due to low liquidity, large trade sizes relative to pool depth, or market movement during the time between submitting and executing a transaction. In DEXs, users can set slippage tolerance — the maximum acceptable price deviation — to protect against excessive slippage, though setting it too tight can cause transactions to fail.
“If you expect to receive 1.0 ETH from a swap but only receive 0.97 ETH due to low pool liquidity, you experienced 3% slippage. Setting a 1% slippage tolerance would have caused this trade to revert.”
AMM (Automated Market Maker)
A type of decentralized exchange protocol that uses mathematical formulas to price assets instead of traditional order books. AMMs enable permissionless trading through liquidity pools, where prices are set algorithmically based on the ratio of tokens in the pool. The most common model is the constant product formula (x × y = k).
Liquidity Pool
A collection of funds locked in a smart contract that enables decentralized trading on AMM-based exchanges. Liquidity providers (LPs) deposit paired tokens in equal value ratios and earn a share of the trading fees generated by swaps in that pool. Pools replace traditional order books in DEX architecture.
DEX (Decentralized Exchange)
A cryptocurrency exchange that operates without a central authority, using smart contracts to enable peer-to-peer trading directly from users' wallets. DEXs never take custody of user funds. Most DEXs use automated market maker (AMM) models with liquidity pools, though some use on-chain order books.
Liquidity
The ease with which an asset can be bought or sold without causing a significant change in its price. High liquidity means large trades can be executed with minimal price impact (slippage), while low liquidity means even small trades can move the price substantially. Liquidity is one of the most important factors in healthy financial markets.