Understanding slippage, fees, and price impact

Swap fees: the fixed cost

Every swap pays a liquidity-provider fee (commonly 0.25–1%), on both entry and exit. It is fixed and knowable per pool, but on frequent small trades it compounds into a real drag.

The spread: a guaranteed gap

The bid-ask spread is the gap between the best buy and sell price, which widens on thin pools. You cross it twice on a round trip, so a wide spread can put you several percent underwater the instant you buy.

Slippage: the variable cost

Slippage is the difference between the quoted and realized price as the pool moves during your trade. It is variable — driven by volatility and other traders — and on fast microcaps it often dwarfs the swap fee. High slippage tolerance also invites sandwich attacks.

Price impact: the self-inflicted cost

Price impact is the portion of the move caused purely by your own size relative to depth. A big buy pumps the price against you on the way in; the matching sell crashes it on the way out. You pay it twice.

How the costs combine

Stack a 0.5% fee, a 1% spread, 2% slippage, and 2% price impact on a round trip, and you need roughly a 5%+ move just to break even — on an asset where you are often chasing single-digit edges. This is why disciplined traders demand setups whose expected move clearly clears total costs.

How to minimize them

• Trade deeper pools where impact and spread are smaller.
• Keep position size a small fraction of liquidity.
• Tune slippage per pool instead of a single global setting.
• Trade less frequently to cut cumulative fees.
• Always budget the full round-trip cost before entering.