Recently, I’ve seen a lot of people in the community talk about the word “liquidity,” but most of them actually can’t explain clearly what it really is. I’m the same—at first it sounds like I understand, but when I try to explain it, I get stuck. So today, let’s talk about liquidity and make it crystal clear in the most straightforward way.

Let’s start with an example close to home. Imagine Hong Kong’s real estate market: which is easier to sell—large residential estates or village houses? It’s definitely large estates. Why? Because the houses in an estate are pretty similar, prices are transparent, buyers and sellers can reach an agreement instantly, and deals can even happen without viewing the property. But village houses are different—each one is unique. Buyers have to put in effort to search for the right one, and sellers also have to wait for the right person to appear. This is the difference in liquidity.

Another example: second-hand phones. The liquidity of iPhones is definitely higher than that of lesser-known brands. Because there are more people who want to buy, it’s easier to find someone to take the phone off your hands, and price fluctuations won’t be that dramatic. This is what high liquidity looks like.

Put simply, liquidity means: if you want to buy, you can buy; if you want to sell, you can sell. And when liquidity is high enough, even large buy orders won’t cause prices to skyrocket, and large sell orders won’t crash the market.

So how does liquidity work in cryptocurrencies? This is where the concept of the “liquidity pool” comes in—LP. Imagine someone deposits a certain amount of two kinds of coins in advance, such as “Apple Coins” and “Banana Coins,” into the pool. Then anyone can swap Apple Coins for Banana Coins anytime, or do it the other way around. If the pool has 100 Apple Coins and 100 Banana Coins, then Alice can spend 1 Banana Coin to get nearly 1 Apple Coin.

Why do I say “nearly” instead of “exactly”? Because when Alice buys Apple Coins, demand for Apple Coins in the market increases, and the supply of Banana Coins increases. Based on basic economic principles, the price of Apple Coins goes up while the price of Banana Coins goes down. So you’ll see price fluctuations.

Whether liquidity is high or low determines whether you can trade smoothly. If Carol wants to buy 50 Apple Coins, but that causes the price to rise sharply—so sharply that even Dave can’t exchange 200 Banana Coins—that’s a sign of insufficient liquidity. But if the liquidity pool has 10,000 Apple Coins and 10,000 Banana Coins, the situation is completely different.

So, to measure liquidity between two assets, mainly look at two indicators: first, how big the liquidity pool is; second, what the trading volume looks like—usually based on 24-hour and 7-day data.

Let’s take a real example. There’s a liquidity pool between LikeCoin and Osmosis. LikeCoin is a token for content creators, and Osmosis is the platform token of a decentralized exchange. This liquidity pool allows creators to swap LikeCoin for Osmosis anytime, and even further swap it into USD stablecoins. As long as liquidity is sufficiently abundant, creators don’t have to worry about whether there will be someone to take the tokens off their hands—content monetization is guaranteed.

Now think: what happens if there’s no liquidity? Holders will be afraid they won’t be able to confirm the true value of their assets, and service providers won’t dare to accept such coins, fearing they won’t be able to sell them later. But once liquidity is sufficient, transactions are transparent and clear. There’s no need for identity verification, and everyone can hold and trade with confidence—then the saying “creation can feed you” can truly become reality.

Liquidity, put plainly, is the lifeblood of an asset. An asset without liquidity is like a book in a library that no one ever borrows—knowledge isn’t wrong, but it’s dead. Assets are the same: if they don’t move, holders can’t use them, and people who need them can’t get them. In the end, the whole society is the one that gets harmed. So remember: keeping assets flowing is just like what Bruce Lee said—Be water, my friend.