#Liquidity101 Liquidity 101: Basic Understanding*

*Liquidity* in crypto (and finance) refers to how easily an asset can be bought or sold without causing a significant price change.

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*Types of Liquidity*

1. *Asset Liquidity*:

How quickly you can convert a crypto asset into cash (or stablecoin) without a big price impact.

2. *Market Liquidity*:

The overall ability of the market to handle buying/selling orders efficiently.

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*Why Liquidity Matters*

- *Price Stability*: High liquidity keeps prices stable and reduces slippage.

- *Trade Efficiency*: More buyers/sellers = faster and smoother trades.

- *Lower Risk*: Illiquid markets can be manipulated or have large price swings.

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*How Liquidity Works*

- On *CEXs*, market makers (humans or bots) provide liquidity by placing limit orders.

- On *DEXs*, *liquidity pools* are used. Users lock tokens (e.g., ETH/USDT) into a smart contract to enable trading.

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*Liquidity Pools (in DeFi)*

- *AMMs (Automated Market Makers)*: Like Uniswap use formulas to price trades.

- *LPs (Liquidity Providers)*: Earn trading fees by supplying tokens to the pool.

- *Risks*: Impermanent loss, smart contract bugs, low volume.