Definition ∞ Exchange liquidity failure occurs when a digital asset exchange cannot meet its withdrawal obligations due to insufficient accessible funds. This situation arises when an exchange lacks the necessary liquid assets to process user withdrawal requests, often due to poor risk management, insolvency, or a sudden surge in redemption demands. It can result in asset freezes, significant financial losses for users, and a loss of trust in the platform. Such failures underscore the importance of robust reserve management and transparent proof-of-reserves mechanisms.
Context ∞ Reports of exchange liquidity failures have been a recurring theme in crypto news, particularly during periods of market volatility or after major platform collapses. These events consistently highlight the counterparty risk associated with centralized exchanges and fuel calls for greater regulatory oversight and industry transparency to protect user funds.
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