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Swaps are one of the most common interactions with a DEX. The mechanism of a token swap is easy to understand and involves selling the tokens currently held by the swapper for a proportionate amount of the target tokens. In this process, a small percentage of the swap fee is deducted, which is the incentive for these liquidity providers.
The execution of swaps on the Rope Protocol (or indeed on most DEX platforms) differs from order book markets. An order book market usually follows a first-in-first-out policy and the timing of your order is important, whereas our swaps are executed against a passive pool of liquidity and liquidity providers on Seil earn transaction fees proportional to the active liquidity they provide.
In an order book market or a CEX, the price impact of an order depends on the size and spread of the opening limit buy or sell orders. The final execution price of an order is typically the weighted average price of multiple limit orders. The price impact in an AMM or concentrated liquidity protocol is somewhat different. During the swap, the relative value of one token to the other changes dynamically and continuously, so the final execution price of a swap is somewhere between the start price and the end price. The price impact of a swap order is affected by the real-time liquidity available in the relevant price space. The price impact will be much smaller for a given swap size if the depth of liquidity at that price is greater.
A swap user will have seen the term 'slippage' or 'price slippage' on a DEX. This is the term we use to describe the potential price change that can occur while a trade is pending.
In order to react to the possible price change, we use the concept of slippage tolerance. Slippage tolerance can be set by a user to determine the maximum price impact they are willing to accept. If the final execution price is outside the acceptable slippage range, the trade will be rejected to protect the user's interests. A trade that uses assets and tokens that are purchased before they are paid for. A trade that uses the tokens purchased before paying for them.