External liquidity refers to the availability of capital and assets from sources outside a specific decentralized finance (DeFi) protocol or blockchain ecosystem. This capital can flow from traditional financial markets, other blockchain networks, or large institutional participants. It is crucial for maintaining stable asset prices and enabling efficient trading within decentralized exchanges and lending platforms. Access to external liquidity enhances the overall market depth and reduces slippage.
Context
Crypto news often reports on efforts by DeFi protocols to attract external liquidity through various incentives, partnerships, or bridging solutions. The integration of institutional capital and the development of robust cross-chain capabilities are key discussion points related to expanding external liquidity. A lack of sufficient external liquidity can lead to market inefficiencies, increased volatility, and difficulties in executing large digital asset transactions.
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