TWAP = Time Weighted Average Price. It's a method of calculating the average price of an asset over a specific time period, weighted by the amount of time the price spent at each level.
TWAP takes into account prices that persist longer. For an asset trades at $100 for 10 minutes and then $110 for 50 minutes, the TWAP will incline the price toward $110 because it was the dominant price for most of the period.
Formula:
TWAP = (Price1 × Time1 + Price2 × Time2 + ... + PriceN × TimeN) / Total Time
Advantages over spot price:
- Harder to manipulate — needs sustained price pressure over time
- Smoother — lowers impact of temporary price spikes
- Fair pricing — reflects actual market price
Limitations:
- Delayed — TWAP lags behind current market price (by design)
- Historical data needed — needs tracking prices over time
- Still vulnerable — with enough capital and time, TWAP can still be manipulated
Example use case:
When a lending protocol like Aave liquidates a position when collateral value drops below a threshold, using TWAP instead of spot price prevents liquidations triggered by temporary price flash crashes or manipulations.
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