"Liquidity" is the lifeline of the crypto world: from everyday experiences to DeFi operational mechanisms

Cryptocurrency communities often talk about “liquidity,” a term that has almost become a standard industry jargon. But when it comes to actually explaining what liquidity is to others, many realize they can’t clearly articulate it. Liquidity may seem simple, but it involves deep logic related to market structure, trading experience, and asset value. Let’s break down this concept in the most straightforward way, understand how it operates in the cryptocurrency world, and why it is crucial to the entire ecosystem.

The Essence of Liquidity: Why It Affects Trading Experience

The concept of liquidity is not unique to cryptocurrencies; it applies to any tradable commodity. Imagine you want to buy a house, and there are two options in the market.

One is a large residential complex, where each building has a similar structure, prices are transparent and easy to compare, buyers can quickly find suitable sellers, and the transaction process is streamlined—many can complete deals without even visiting the site. The other is a boutique village house, each with unique features based on location, orientation, and maintenance, with large price differences. Both parties need to spend considerable time finding each other and doing research, making the process lengthy.

Obviously, transactions in the large residential complex are much more efficient than in the boutique houses. This is a concrete example of differences in liquidity.

The same logic applies to the mobile phone market. The resale speed and price stability of second-hand iPhones far surpass those of older Android models with fewer users. Why? Because more people want to buy, and more want to sell, making prices easier to settle and less volatile.

The simplest way to define liquidity is:

Can buy when you want, and can sell when you want.

When liquidity reaches a sufficiently high level, the effects become more apparent:

A large influx of buyers prevents prices from skyrocketing; a large number of sellers prevents prices from plummeting. The market remains relatively stable amid high trading volume.

How Supply and Demand Drive Liquidity Changes

In basic economics classes, teachers love to draw two intersecting lines on the blackboard—one representing supply, the other demand. This simple chart explains how market prices fluctuate with changes in supply and demand. The operation of liquidity in cryptocurrencies also follows this fundamental principle.

Suppose there are two tokens in the market: APPLE and BANANA. How do changes in supply and demand affect their relative value?

When more people want APPLE, demand for APPLE rises, while the supply of BANANA relatively increases. According to basic economics, the price of APPLE will go up, and BANANA’s price will fall. This process occurs in any trading pair, and the level of liquidity determines how dramatic these price adjustments are.

High-liquidity trading pairs will see more gradual price changes; low-liquidity pairs, even with modest trading volume, can experience sharp fluctuations.

The Innovation Breakthrough of Liquidity Pools

To understand how cryptocurrencies achieve efficient liquidity, you must recognize the revolutionary concept of “Liquidity Pools” (LP).

Traditional exchanges rely on market makers to provide liquidity—they are always ready to buy or sell assets at specific prices. In decentralized exchanges, Liquidity Pools replace this role. Anyone can lock equivalent amounts of two tokens into a smart contract, forming a liquidity pool. Other traders can then swap (Swap) with this pool at any time.

For example, suppose the APPLE-BANANA LP contains 100 APPLE and 100 BANANA. Alice can pay 1 BANANA to receive close to 1 APPLE, and Bob can pay 1 APPLE to get close to 1 BANANA. It sounds simple, but this mechanism fundamentally changes how crypto assets are liquidated.

Why do I say “close to 1” instead of exactly “1”? Besides transaction fees, a more important reason is that each swap changes the ratio of the two tokens in the pool. When Alice pays BANANA to get APPLE, the pool’s APPLE decreases, BANANA increases, which directly pushes up the relative price of APPLE and lowers that of BANANA. This is the real-time effect of supply and demand.

When the APPLE-BANANA LP grows from 100+100 to 10,000+10,000, liquidity is greatly enhanced. The same trading volume will have less impact on prices, greatly improving the trading experience.

Therefore, to measure the liquidity of any trading pair, mainly look at two indicators:

1. Size of the liquidity pool—the more capital locked in, the stronger the liquidity
2. Trading volume statistics—usually observed over 24 hours and 7 days, reflecting market activity

Real Liquidity Demonstration from LIKE to OSMO

Let’s move from the fictional Apple and Banana to the real crypto world. LikeCoin (ticker LIKE) is a token designed for creators, and Osmosis (ticker OSMO) is the platform token of the decentralized exchange Osmosis.

The LIKE-OSMO LP acts as a bridge between the two, allowing holders to swap at any time. According to public blockchain data, this pool once had over $1.04 million in liquidity, with about $520,000 worth of LIKE and OSMO each. The past 24 hours saw over $30,000 in trading volume, and weekly volume exceeded $230,000.

What does this number represent? It means that creators earning LIKE tokens can efficiently swap them for OSMO at any time, and even convert further into stablecoins like UST, ultimately cashing out into USD. The entire process is open 24/7, without waiting for bank hours or intermediaries of traditional finance.

Imagine a creator earning LIKE tokens on a platform but unsure of their actual value, worried about finding buyers. Here, sufficient liquidity acts as a safety net. The existence and active trading of LIKE-OSMO LP prove to the market that these tokens are not dead assets—they can circulate, be liquidated, and used to buy other assets or meet daily needs.

This confidence is vital for the development of the entire creator economy ecosystem.

The Cost of Liquidity Shortage and the Power of Sufficient Liquidity

The English word “Liquidity” is colloquially nicknamed “water” in some cultures, metaphorically representing the flow of money. Data and assets need to be fluid to realize their value.

Assets lacking liquidity are like old books sealed away in library corners—rich in content, but if no one reads them, knowledge cannot be transmitted. Similarly, assets with low liquidity cannot be effectively liquidated. Holders cannot easily cash out, and those who want to use them cannot acquire them, resulting in mutual losses: holders are troubled by illiquidity, potential users miss opportunities, and society as a whole cannot allocate resources optimally.

Returning to the LIKE story: if liquidity were completely absent, LikeCoin holders would face a dilemma—they couldn’t accurately assess the market price, and no one would accept LIKE as payment because no one knows if they can quickly sell it. Creators might give up using the platform due to concerns over cashing out. The entire ecosystem would suffocate.

But in reality, the opposite is true. Thanks to ample liquidity, transparent trading, and a process that requires no identity verification and is highly decentralized, everyone can confidently hold, receive, and use LIKE tokens. Creators can focus on creation, knowing their labor value can be instantly converted into other assets when needed. This is the true premise of “creation can feed you.”

Liquidity is not just a technical indicator; it embodies the vitality of an asset. Sufficient liquidity means the asset is genuinely accepted by the market, can circulate in various scenarios, and ultimately realize its rightful value.

In the world of cryptocurrencies, be water, my friend—let assets flow like water, and the market will thrive.