What Does Liquidity Mean?

Liquidity within a transaction refers to how easy it is to convert an instrument into cash for withdrawal. Cash is considered the standard for liquidity because it can easily be exchanged to and from other assets. Some other examples of liquid assets are Treasury bills, notes and bonds.

If a financial transaction is an engine with moving parts, then liquidity is the oil that makes it move. Currently, there are pools of trapped capital all around the world, and sending money from one currency to another requires financial institutions to pre-fund accounts in the destination currency. In order for transactions to flow freely across borders and pay out instantly, there needs to be enough volume of the transactional instrument (XRP, in the case of On-Demand Liquidity) being traded from one currency to the next. If liquidity doesn’t flow, transactions break down.