Glossary · L
Liquidity
The ease with which an asset can be bought or sold without significantly affecting its price. High liquidity means large orders can be filled with minimal slippage. In DeFi, liquidity is provided by users who deposit assets into AMM pools, lending pools, or order books.
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How Liquidity works in practice
Liquidity is how much can be traded without materially moving the price. It is the difference between a quoted price and an achievable one, and it is the variable most often ignored when people evaluate a position they might need to exit.
Worked example
A token with 50m of daily volume across deep pools absorbs a 100,000 sale with negligible impact. The same sale against a 200,000 pool moves the price sharply and returns far less than the quoted value.
Figures are illustrative and chosen to be checkable, not live market data.
The mistake that costs people money
Valuing a holding at the screen price. A position is only worth what you can actually exit at, and thin-liquidity assets are marked at prices that evaporate the moment anyone tries to realise them.
Liquidity: common questions
- What is Liquidity?
- The ease with which an asset can be bought or sold without significantly affecting its price. High liquidity means large orders can be filled with minimal slippage. In DeFi, liquidity is provided by users who deposit assets into AMM pools, lending pools, or order books.
- How does Liquidity work in practice?
- Liquidity is how much can be traded without materially moving the price. It is the difference between a quoted price and an achievable one, and it is the variable most often ignored when people evaluate a position they might need to exit.
- Can you give an example of Liquidity?
- A token with 50m of daily volume across deep pools absorbs a 100,000 sale with negligible impact. The same sale against a 200,000 pool moves the price sharply and returns far less than the quoted value.
- What do people get wrong about Liquidity?
- Valuing a holding at the screen price. A position is only worth what you can actually exit at, and thin-liquidity assets are marked at prices that evaporate the moment anyone tries to realise them.