Crypto liquidity measures how easily an asset trades without major price swings.High liquidity means quick trades, stable prices, and minimal slippage (difference between expected/actual trade price). It's vital: reducing risk, boosting confidence, attracting participants, and enabling DeFi.
Liquidity is gauged by:
* Trading volume (higher is better),
* Bid-ask spread (smaller is better - the gap between buy/sell prices),
* Market depth (more orders at various prices is better).
In DeFi, liquidity pools replace traditional order books. Users act as liquidity providers (LPs), depositing crypto pairs into pools governed by Automated Market Makers (AMMs) to earn fees, powering decentralized trading.
