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On decentralized exchanges traders swap tokens against a liquidity pool. In contrast to centralized exchanges that use limit order books. Due to the nature of such exchanges traders often face the error message "price impact too high". This short article walks through why this occurs, how to fix "Pancakeswap price impact too high" and what to pay attention in terms of trading on decentralized exchanges.
This problem not only occurs on Pancakeswap but also on other decentralized exchange such as Uniswap, Sushiswap or other liquidity pool based DEXes.
Why the error Pancakeswap price impact too high occurs
In short, liquidity providers (LPs) lock up (i.E. BNB and USDT) in the same ratio (i.E. 1000$ worth of BNB and 1000 USDT) in the liquidity pool. The sum of all the capital locked up by LPs is the liquidity in a given market. The liquidity locked in that market is distributed via a price curve.
That price curve determines how much liquidity is available at a given price level (simplified). Hence, at the current market price there is only a limit amount of tokens available to buy/sell. The larger the order gets, the more impact that order has on price as it takes capital from one side of the liquidity pool and adds that to the other side of the liquidity pool.
On large markets like BNBUSDT on Pancakeswap this typically doesn't matter for most retail traders, however on small token markets often there is not much liquidity in the market which can sometimes result in a large price impact (or "slippage") - even with smaller order sizes.
How to fix Pancakeswap price impact too high?
Now, when you want to buy or sell on that market, you have some settings that you can manipulate. One of the settings is called "slippage" or price impact. In order to solve "Pancakeswap price impact too high", you have to play around with that number. The default price impact is typcially set to somewhere around 2%, however on most smaller markets you may face slippage of up to 25%.
Therefore, you need to set the price impact parameter to some value of up to 25%. Also, make sure there is enough Binance Coin (or on other chains e.g. Ether) in your wallet to cover gas fees.
The screenshot below shows the settings on Pancakeswap. To access those, you need to press the gear icon in the swap tab. The setting "Slippage Tolerance" is what you want to set as described above.
Tools like Dextools, Dexguru or DeFiLlamma let you monitor liquidity in a given market. Those stats may be valuable before making an investment decision as you can analyze how much liquidity is locked in a market and often you will also see how that liquidity is distributed.
For example if the vast majority of the locked capital is provided by one wallet, you are at risk of a rug pull where the LP removes the liquidity and therefore makes the token worthless as there is no liquidity pool supporting buying and selling.
What token issuers can do to prevent Pancakeswap price impact too high
If you are a token issuer or are engaged in the community of a token project that faces the error "Pancakeswap price impact too high", you may want to consider working with a dedicated market maker. Market makers can support projects in provoding liquidity and efficiently leveraging capital to improve a markets health, increase liquidity and attract new traders to the markets.
In the end, tokens are traded on the free market. Any project that incorporates a token has to look into how their markets work and what steps to take to improve liquidity and prevent errors such as "Pancakeswap price impact too high".
Conclusion
To sum up we have discussed how the error Pancakeswap price impact too high is caused, how to fix it and what token issuers can do in order to improve liquidity in their markets. Decentralised exchanges are still early, therefore the risk of untested contracts, rug pulls and other threats are omnipresent that need to be accounted for in a traders decision making process.
None of the content above is financial advise and is for educational purposes only. Find more content on algorithmic trading software, crypto market making and market microstructure on Autowhale’s blog.
