Liquidity Shock

Definition ∞ A Liquidity Shock is a sudden and severe reduction in market liquidity, making it difficult to buy or sell assets without causing substantial price movements. This event can result from unforeseen market events, rapid investor withdrawals, or a sudden loss of confidence. It disrupts normal trading conditions and can amplify price volatility. Such shocks pose significant risks to market stability.
Context ∞ The digital asset market is particularly susceptible to Liquidity Shocks due to its relative immaturity and fragmented nature. News reports frequently cover instances where major market events, such as the collapse of a large crypto entity or a significant hack, lead to sudden and drastic drops in liquidity. Understanding these shocks is essential for assessing the operational risks within cryptocurrency exchanges and decentralized finance protocols.