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Liquidity drain Meaning

A catastrophic event where a large amount of liquidity is suddenly removed from a market or a protocol. This can happen legitimately (if a major "liquidity provider" decides to withdraw their funds) or maliciously (in a "Rug Pull" or a hack).

When liquidity is drained, the market becomes "Thin" and "Illiquid." This means that even small trades will cause massive price swings. If a DEX pool is drained, users may find themselves "stuck" in a token with no way to sell it, as there is no more money in the pool to "buy" their tokens from them.

Liquidity drains are often a "death sentence" for a project. Without liquidity, there is no trading; without trading, there is no fee revenue; and without revenue, the project cannot survive.

Protecting against "sudden drains" is why many protocols use "Vesting" and "Liquidity Locks" to prove to the community that the founders cannot suddenly pull the rug out from under them.

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