What Are the Risks of a Token Being Too Illiquid Due to High TVL Locking?

A token that is too illiquid due to a very high percentage of its supply being locked in TVL or staking poses a risk to investors because any large sell order could trigger extreme price volatility (high slippage). While scarcity is good for intrinsic value, excessive illiquidity makes it difficult for investors to enter or exit positions without a significant price impact, which increases the trading risk and may deter institutional investors.