Liquidity
The ease with which an asset can be bought or sold without causing a significant change in its price. High liquidity means large trades can be executed with minimal price impact (slippage), while low liquidity means even small trades can move the price substantially. Liquidity is one of the most important factors in healthy financial markets.
“Bitcoin has deep liquidity — you can sell millions of dollars worth without significantly moving the price. A small-cap altcoin with thin liquidity might see a 10% price drop from a single $50,000 sell order.”
Liquidity Pool
A collection of funds locked in a smart contract that enables decentralized trading on AMM-based exchanges. Liquidity providers (LPs) deposit paired tokens in equal value ratios and earn a share of the trading fees generated by swaps in that pool. Pools replace traditional order books in DEX architecture.
Slippage
The difference between the expected price of a trade and the actual executed price. Slippage occurs due to low liquidity, large trade sizes relative to pool depth, or market movement during the time between submitting and executing a transaction. In DEXs, users can set slippage tolerance — the maximum acceptable price deviation — to protect against excessive slippage, though setting it too tight can cause transactions to fail.
Market Maker
An entity or algorithm that provides liquidity to markets by continuously placing buy and sell orders on both sides of the order book, profiting from the bid-ask spread. In crypto, professional market makers ensure healthy trading volumes, reduce price volatility, and minimize slippage for tokens listed on exchanges.
Trading
The buying and selling of cryptocurrencies with the goal of generating profit from price movements. Crypto trading occurs on centralized exchanges (using order books), decentralized exchanges (using liquidity pools), and via derivatives platforms. Common strategies include spot trading (buying/selling actual assets), margin trading (using leverage), and derivatives trading (futures, perpetuals, options).