Liquidity

• From RareSkills (23-12-2024):

"Liquidity, in the context of AMMs, measures the combined reserves of [a] token pair.

Liquidity providers (LPs) provide liquidity when they deposit tokens into the pool in hopes of earning fees during swaps. Their deposit increases the reserves, which in turn, increases the liquidity."

High liquidity is desirable because traders can “swap out” more of a token. If a pool only holds 1000 USDC, it is impossible for a trader to swap out more than 1000 USDC. But even if they don’t need to use up all the reserves of a particular token, traders still prefer higher liquidity because higher liquidity reduces price impact."

• From this report by Chorus One (6-2020):

"Liquidity is a word that is notoriously (ab)used in the decentralized finance ecosystem. The classic definition of liquidity goes as follows: liquidity is the degree to which an asset can be easily converted into cash in the market. A liquid asset can be converted at short notice without incurring significant discounts because there is a reasonable degree of buying and selling volume."

• DEX's who are trying to gain more traction need liquidity of the tokens on their platform to attract users with good prices. Liquidity Mining has been one example of trying to attract liquidity and users towards their project. People who participate in this kind of mining are often called LPs and sometimes yield farmers.