Trading against a pool
Some decentralized exchanges use automated market makers rather than a conventional order book. Traders interact with pools whose pricing rules respond to their balances. Liquidity providers supply assets and may receive fees.
Different designs use different formulas and liquidity ranges. A familiar swap interface can conceal meaningful differences in how prices are calculated and how liquidity is allocated.
Price impact and slippage
Price impact is the movement caused by the trade itself relative to available liquidity. Slippage also describes a difference between the expected and executed outcome as conditions change. A tolerance setting limits an accepted outcome; it does not manufacture liquidity.
For example, swapping a large amount into a shallow pool can be costly even if the displayed trading fee is low. Check the expected amount received and route rather than comparing fees alone.
Providing liquidity is a separate activity
A provider’s asset mix can change as others trade. Its value can differ from simply holding the starting assets, a phenomenon commonly called impermanent loss. Concentrated liquidity adds decisions about price ranges and periods outside those ranges.
Fees do not guarantee that a position will outperform holding. Contract vulnerabilities, token behavior and transaction-ordering effects also matter. To learn, compare hypothetical pool outcomes under unchanged, rising and falling relative prices before using a live position.
A constant-product pool example
Consider a simplified pool with 100 units of Asset A and 10,000 units of Asset B, whose reserve product is 1,000,000. Ignoring fees, adding 10 A would leave 1,000,000 ÷ 110, or about 9,090.91 B. The trade receives about 909.09 B. It does not receive 1,000 B simply because the initial reserve ratio was 100 B per A.
This model illustrates price impact. Actual exchange designs can use concentrated liquidity, multiple pools, routing and different fee rules, so the simple formula should not be treated as a quote for every decentralized exchange.
Providing liquidity creates a different position
A liquidity provider holds a claim on changing pool reserves and may receive trading fees. As relative asset prices change, that position can perform differently from holding the original assets separately. The familiar term “impermanent loss” should not be read as a promise that the difference will reverse.
Check the actual pool, token contracts, fee tier, active liquidity range and any incentives. Reward tokens have their own price and liquidity risks. A large advertised yield can combine fee income with temporary incentives rather than a durable return from trading activity.
Sources & further reading
Educational content. Examples are illustrative. Protocols, products and rules can change; consult the linked documentation for current details.