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Illiquid markets Meaning

A market environment where there are very few participants and low trading volumes. In an illiquid market, it is difficult to buy or sell an asset quickly without significantly moving the price.

The gap between the highest buyer's price and the lowest seller's price (the bid-ask spread) is typically very wide. Assets in these markets are often niche, such as small-cap tokens or rare NFTs.

For an investor, illiquidity represents a major risk; if they need to exit a position during a market downturn, they may find no buyers at all, forcing them to "fire sell" the asset at a massive discount just to find a "taker." Protocols often try to solve this by incentivizing liquidity through "liquidity mining" programs.

By offering rewards to those who provide assets to a trading pair, a protocol can increase the "depth" of the market, making it more stable and attractive for larger trades and institutional participation.

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