In both DeFi (Decentralized Finance) and traditional financial markets, liquidity refers to the ease with which an asset can be bought or sold without significantly affecting its price. However, the mechanisms by which liquidity is provided and managed differ between the two systems.

In traditional financial markets, liquidity is typically provided by institutions such as banks, brokers, and market makers. These entities facilitate transactions by buying and selling assets to ensure the market remains fluid, often taking advantage of bid-ask spreads for profit. Liquidity in these markets is also driven by centralized exchanges, which maintain control over trade settlements and provide the infrastructure for transactions.

In contrast, DeFi operates without centralized intermediaries. Liquidity is often supplied by users themselves through liquidity pools in decentralized exchanges (DEXs) like Uniswap or SushiSwap. In these pools, participants deposit pairs of assets into smart contracts, enabling automatic trading between them. This process is governed by automated market makers (AMMs), which adjust prices based on supply and demand in the pool. Users who provide liquidity in DeFi are rewarded with a portion of transaction fees, incentivizing participation.

One key difference is that DeFi liquidity is more dynamic and decentralized, relying on user participation rather than institutional backing, offering a more open and accessible system globally.