Liquidity
In short: Liquidity is the ease of converting an asset into cash, or into another asset, quickly and without noticeably moving its price.
Liquidity is the ease of converting an asset into cash, or into another asset, quickly and without noticeably moving its price. A highly liquid asset can be bought or sold in large amounts close to its current market price.
Why it matters
On an exchange, liquidity is visible in the order book: a liquid market has many buy and sell orders near the current price, so the spread is narrow and large orders fill with little slippage. In an illiquid market, one large order can move the price sharply, and exiting a position at a fair price can be hard. High reported trading volume does not always mean deep liquidity, because volume can be inflated by wash trading. On many decentralized exchanges, liquidity comes from pools funded by users rather than from an order book.
Example
Imagine two tokens. The first has many orders on both sides of the order book, all close to the last traded price, so selling a mid-sized position barely changes the price. The second has only a few scattered orders, so selling the same amount eats through several price levels and the average sale price ends up well below the last traded price. The first market is liquid; the second is not.