How Does a Lack of Liquidity Exacerbate a Death Spiral? ▴ Learn

How Does a Lack of Liquidity Exacerbate a Death Spiral?

A lack of liquidity means there are not enough buyers willing to purchase the de-pegged stablecoin or the volatile governance token. This causes the price to fall faster and deeper with each sale.

The protocol's stabilization mechanism, which relies on arbitrage and market participants, becomes ineffective because the low liquidity prevents efficient trading and price restoration.

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