Low Liquidity State

Definition ∞ A low liquidity state in digital asset markets describes a condition where there is insufficient trading volume or a limited supply of available assets to facilitate large transactions without significantly impacting prices. In such a state, even relatively small buy or sell orders can cause substantial price movements, leading to increased volatility and slippage. This condition can make it difficult for traders to enter or exit positions efficiently. It presents heightened risks for market participants and automated trading systems.
Context ∞ Crypto news frequently reports on assets or markets experiencing low liquidity, especially during periods of market stress or for newer, less established tokens. This situation can make protocols vulnerable to price manipulation attacks, such as those leveraging flash loans. Discussions often focus on strategies to improve liquidity, including incentivizing market makers and enhancing decentralized exchange mechanisms.