#Liquidity101 Definition of liquidity

Liquidity is the ease with which an asset (e.g., cryptocurrency) can be bought or sold in the market without a significant impact on its price.

• High liquidity = ease of quick trading without large price changes.

• Low liquidity = difficulties in quick buying/selling and large price fluctuations.

2. Why is liquidity important?

• Price stability – with high liquidity, prices are more stable because there are many buyers and sellers.

• Fast transaction execution – transactions occur quickly, without long waiting times.

• Smaller spreads – the difference between the buying price (bid) and selling price (ask) is small, which means lower trading costs.

• Investor confidence – liquid markets are more attractive to traders and investors.

3. Liquidity in different places

In centralized exchanges (CEX)

• Liquidity depends on the number of users and trading volume.

• Large exchanges like Binance or Coinbase have high liquidity.

In decentralized exchanges (DEX)

• Liquidity comes from so-called liquidity pools, which are funds provided by users (liquidity providers).

• The larger the liquidity pool, the better the prices and faster transactions.

• Example: Uniswap, PancakeSwap.

4. Liquidity Provider

• A person who deposits their cryptocurrencies into a liquidity pool on a DEX.

• In return, they receive transaction fees and sometimes additional rewards (yield farming).

• Risk: impermanent loss – temporary loss of token value due to price changes.

5. Spread and slippage

• Spread – the difference between the best buying and selling price.

• Slippage – the difference between the expected transaction price and the actual execution price, often occurring at low liquidity.