Liquidity
- Liquidity is how easily an asset can be bought or sold without significantly moving its price, with a highly liquid market having plenty of buyers and sellers close together.
- On an order-book exchange liquidity shows up as the depth of buy and sell orders around the current price, while in DeFi it is supplied to pools that trades are priced against.
- When liquidity is thin, even a modest order can cause large slippage, so low-liquidity assets can be difficult to sell at the displayed price.
Liquidity is how easily an asset can be bought or sold without significantly moving its price. A highly liquid market has plenty of buyers and sellers close together, so trades fill quickly and near the quoted price.
How it works
On an order-book exchange, liquidity shows up as the depth of buy and sell orders around the current price. In DeFi, liquidity is supplied to pools by users who deposit pairs of tokens, and trades are priced against those pools. When liquidity is thin, even a modest order can cause large slippage — a worse fill than expected.
Why it matters
Liquidity affects the real cost of trading, the reliability of a quoted price, and how safely you can enter or exit a position. Low-liquidity assets can look attractive on paper but be difficult to sell at the displayed price, especially in size.
Example
Selling a large amount of a thinly traded token may push the price down as your order eats through the available buy orders.
Why does liquidity matter when trading?
What is slippage and how is it related to liquidity?
How is liquidity provided in DeFi?
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