What Is the Spread?

The spread is the gap between the highest price a buyer is willing to pay (the best bid) and the lowest price a seller is willing to accept (the best ask). If the best bid for ETH is $1,998 and the best ask is $2,001, the spread is $3. This gap is the most fundamental cost of trading. Every time you execute a market order, you cross the spread, buying at the ask or selling at the bid.

The spread exists because market makers need compensation for providing liquidity. They sit on both sides of the market, willing to buy and sell at any moment, and the spread is how they get paid for that service.

Why the Spread Exists

Market makers provide a service. They stand ready to buy and sell at any time, absorbing the timing mismatch between buyers and sellers. The spread compensates them for three risks.

• Inventory risk. After filling a buy order, the market maker now holds more of the asset. If the price drops, they lose money. The spread provides a buffer.
• Information asymmetry. Some traders have better information. If an informed trader knows the price is about to move, the market maker is on the losing side. Wider spreads protect against this adverse selection.
• Operational cost. Maintaining systems, posting orders, and managing risk all cost money. The spread covers these operational expenses.

Spread in Traditional Markets

Highly liquid assets like Apple stock or EUR/USD have extremely tight spreads, often just one cent or one pip. The spread on AAPL might be $0.01 on a $180 stock, which is about 0.006%. There are so many market makers competing that the spread gets compressed to almost nothing.

Illiquid assets tell a different story. A small-cap stock might have a spread of $0.50 on a $10 stock (5%). An exotic currency pair or a thinly traded commodity future can have spreads measured in percentage points. The less competition among market makers and the less volume, the wider the spread.

Spread in DeFi

AMMs do not have explicit bid and ask prices. There is no order book with visible spread. Instead, the spread emerges implicitly from two sources.

First, the bonding curve itself creates a spread. When you buy a token from an AMM, you push the price up along the curve. If you immediately tried to sell the same amount back, you would get less than you paid because selling pushes the price back down. The round-trip cost is the implicit spread.

Second, swap fees widen the spread further. Uniswap V3 offers multiple fee tiers that LPs choose when creating pools.

• 0.01% for stablecoin pairs (USDC/USDT)
• 0.05% for correlated pairs (stETH/ETH)
• 0.30% for standard pairs (ETH/USDC)
• 1.00% for exotic or volatile pairs

The fee is applied on top of the curve impact, so the effective spread on a Uniswap V3 ETH/USDC pool with a 0.30% fee tier is at minimum 0.60% for a round trip (0.30% to buy, 0.30% to sell), plus whatever additional curve impact the trade size causes.

Measuring the Spread

There are several ways to quantify the spread.

• Absolute spread \(= \text{best ask} - \text{best bid}\) (e.g. $2,001 - $1,998 = $3)
• Relative spread \(= \dfrac{\text{absolute spread}}{\text{midpoint price}}\), usually expressed in basis points (bps). A $3 spread on a $2,000 midpoint is 15 bps (0.15%)
• Effective spread \(= 2 \times |\text{execution price} - \text{midpoint}|\). This captures the actual cost of a specific trade, accounting for partial fills at different price levels

For AMM pools, we can compute the implied spread by simulating a buy and a sell of the same size against the reserves.

// Read Uniswap V2 pool reserves and compute the implied spread

import (
    "context"
    "fmt"
    "math"
    "math/big"

    "github.com/ethereum/go-ethereum"
    "github.com/ethereum/go-ethereum/common"
    "github.com/ethereum/go-ethereum/crypto"
    "github.com/ethereum/go-ethereum/ethclient"
)

func getImpliedSpread(client *ethclient.Client, pairAddr common.Address, tradeSize float64) {
    // getReserves() selector
    selector := crypto.Keccak256([]byte("getReserves()"))[:4]

    result, _ := client.CallContract(context.Background(), ethereum.CallMsg{
        To:   &pairAddr,
        Data: selector,
    }, nil)

    // Decode ABI-packed (uint112, uint112, uint32)
    reserve0 := new(big.Int).SetBytes(result[0:32])
    reserve1 := new(big.Int).SetBytes(result[32:64])

    x := float64(reserve0.Int64()) / math.Pow(10, 18) // ETH (18 decimals)
    y := float64(reserve1.Int64()) / math.Pow(10, 6)  // USDC (6 decimals)
    k := x * y

    spotPrice := y / x

    // Buy tradeSize ETH -- remove ETH from pool, add USDC
    newX := x - tradeSize
    buyPrice := (k/newX - y) / tradeSize

    // Sell tradeSize ETH -- add ETH to pool, remove USDC
    newX2 := x + tradeSize
    sellPrice := (y - k/newX2) / tradeSize

    absoluteSpread := buyPrice - sellPrice
    relativeSpreadBps := (absoluteSpread / spotPrice) * 10000

    fmt.Printf("Spot price:       %.2f\n", spotPrice)
    fmt.Printf("Buy price:        %.2f\n", buyPrice)
    fmt.Printf("Sell price:       %.2f\n", sellPrice)
    fmt.Printf("Absolute spread:  %.2f\n", absoluteSpread)
    fmt.Printf("Relative spread:  %.1f bps\n", relativeSpreadBps)
}

What Moves the Spread

The spread is not static. It widens and tightens in response to market conditions.

• Volatility. When prices are moving fast, market makers face more risk and widen their spreads. In DeFi, high volatility means more divergence loss for LPs, which can cause them to withdraw liquidity, further widening spreads.
• Volume. High trading volume attracts market makers because they can earn more from the spread. More competition narrows the spread. Low volume does the opposite.
• Pool depth / order book depth. Deeper liquidity means each trade has less impact on the price, keeping the effective spread tight. Shallow liquidity means even small trades widen the effective spread.
• Fee tier. In Uniswap V3, pools with lower fee tiers have tighter minimum spreads but may have less liquidity. The fee tier sets a floor for the spread.

Understanding the spread is the first step. But the spread only tells you the cost of an infinitely small trade. For real trades of meaningful size, you also need to understand slippage, which measures how much worse your execution gets as your trade size increases.

For the broader framework of how these mechanics fit together, see Market Microstructure. For how swaps are executed as on-chain transactions through smart contracts, see the contracts deep dive.