What Is the Concept of “Liquidity Depth” and Why Is It Important for Collateral Assets?

Liquidity depth refers to the volume of buy and sell orders available at various price levels near the current market price on an order book. High liquidity depth means there are large orders ready to be filled without causing significant price movement (low slippage).

This is critical for collateral assets because, in a liquidation event, the exchange must sell the collateral quickly. High depth ensures the collateral can be sold at a price close to the mark price, minimizing the loss to the insurance fund and reducing the risk of negative equity.