Definition ∞ A liquidity reset refers to a significant event or action that fundamentally alters the available capital and trading conditions within a digital asset market or protocol. This can occur due to a major protocol upgrade, a large-scale market event, or a deliberate governance decision that changes the structure of liquidity provision, such as adjusting incentive programs or modifying underlying economic parameters. The outcome is a recalibration of market depth, trading volumes, and asset availability, potentially leading to new equilibrium points for prices and trading activity. It often requires participants to re-evaluate their strategies and redeploy capital.
Context ∞ Liquidity resets are observed in decentralized finance (DeFi) when protocols introduce new versions or implement substantial economic policy changes, influencing how users supply and withdraw assets. News reports often cover the impact of such resets on token prices, trading volumes, and the migration of capital between different protocol versions. The community frequently discusses the necessity of these resets for long-term protocol health versus the short-term disruption they cause to market participants.
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