"Liquidity" understood and profit? The hidden rules of the cryptocurrency world

Cryptocurrency communities talk about “liquidity” every day, but most people only have a vague understanding of it. They think they understand, but when asked to explain clearly, they get stuck. Today, we’ll break down what liquidity really means in the simplest terms.

Liquidity = Can I buy easily? Can I sell easily?

Let’s set aside technical details and play a simple example. The same type of property—why is some easy to sell, while others remain unsold?

Imagine two types of properties: one is a “village house” in Hong Kong—different layouts, orientations, views, requiring buyers to spend time choosing, and sellers to spend time finding buyers. The other is a large residential complex—standardized layouts, transparent prices, quick matching between buyers and sellers, even transactions without viewing the property. Which is easier to sell? Of course, the complex. This illustrates the difference between high and low liquidity.

Another example: second-hand smartphones. iPhones have much higher liquidity because of standardized specs worldwide, transparent pricing, and many buyers. Generic Android phones? Relatively harder to sell.

So, the essence of liquidity is simple:

Many people want to buy, and they can buy; many want to sell, and they can sell. Moreover, the price won’t skyrocket or plummet just because of high trading volume.

Assets with high liquidity have low transaction costs, stable prices, and strong confidence. Assets with low liquidity are hard to trade, have large price swings, and people fear being stuck with them.

How do decentralized exchanges rely on LPs to provide liquidity?

Economics 101 teaches us that supply and demand determine prices. How do crypto exchanges create liquidity? The answer is “Liquidity Pools” (LP).

Imagine a liquidity pool containing two assets, for example, APPLE tokens and BANANA tokens. The pool holds 100 APPLE and 100 BANANA. Anyone can exchange BANANA for APPLE or vice versa at any time. Alice pays 1 BANANA to get close to 1 APPLE. Bob pays 1 APPLE to get close to 1 BANANA.

Why “close” instead of “exact”? First, because of transaction fees. Second, when Alice exchanges BANANA for APPLE, the demand for APPLE increases, and the supply of BANANA increases. Economics tells us that the price of APPLE will rise, and BANANA will fall. This is normal.

But if the pool only has 100+100, and Carol wants to buy 50 APPLE, it will cause APPLE’s price to surge significantly, and Dave might not even be able to buy 200 BANANA. This is liquidity shortage.

Conversely, if the pool has 10,000 APPLE and 10,000 BANANA, liquidity is much greater. To measure liquidity, two indicators are enough:

1. Total size of the LP (how much value is locked in the pool)
2. Trading volume (activity over 24 hours and 7 days)

Large size and active trading mean good liquidity. Conversely, small size and low activity mean poor liquidity.

Real-world example: How LIKE connects creators through liquidity

Talking about concepts can be dull, so let’s look at a real case.

LIKE is the token code for LikeCoin, and OSMO is the platform token of the decentralized exchange Osmosis. The LIKE-OSMO liquidity pool allows anyone to swap between these two assets at any time. According to on-chain data, the pool once reached a USD scale of over 1.04 million, meaning about 520,000 USD worth of LIKE and 520,000 USD worth of OSMO. The 24-hour trading volume is about 32,000 USD, and weekly volume around 234,000 USD.

What does this mean? Creators earn LIKE through their work and want to cash out anytime? No problem—ample liquidity means quick transactions. Want to convert to stablecoins like UST-OSMO? There’s a LP ready for you, plus automated routing, so users can do it in one step, and the exchange handles it automatically.

Imagine if LIKE had no liquidity—what would happen? Creators would be unsure of its value; no one would want to accept LIKE for payment, fearing no exit; service providers might refuse LIKE payments, worried about cashing out. The result? Creators lose motivation to participate, and the entire ecosystem stalls.

But with sufficient liquidity, the situation reverses: everyone feels safe holding and accepting LIKE, the ecosystem flows, and creators can truly “make a living” from their work.

Liquidity is vitality; assets must flow to be meaningful

The English term “Liquidity” vividly resembles the Cantonese metaphor of money as “water”—it must flow to be useful.

Assets and data are the same. An old book in a library that no one borrows is not wrong; it’s just dead knowledge, never transmitted from author to reader. Assets are similar—lack of liquidity is like “occupying a toilet without using it”—the owner can’t use it, and those who need it can’t get it. The result? Personal loss, and society can’t move forward.

Conversely, when assets have ample liquidity, and prices are objective, transparent, and tradable without identity verification, everyone is confident in holding and using them. Capital flows more efficiently to where it’s needed, and creators, investors, and users all benefit.

Remember: liquidity is not a highbrow financial topic; it’s the fundamental issue of whether assets can truly realize their value. Next time you hear “liquidity,” you’ll understand what people are talking about.

Let assets flow like water, and the economy will come alive.