How can liquidity be defined in the context of decentralized exchanges?

In the context of decentralized exchanges, liquidity refers to the ease with which assets can be bought or sold without causing a significant impact on their market price. When a market has high liquidity, traders can execute large orders without drastically affecting the price of the asset, which is essential for facilitating smooth trading operations.

High liquidity indicates that there are enough buyers and sellers in the market, allowing participants to enter and exit positions more efficiently. This characteristic is crucial for traders as it reduces transaction costs and minimizes the risk associated with price fluctuations during trading. Liquidity in decentralized exchanges is often achieved through mechanisms like liquidity pools, where users provide tokens in exchange for a share of transaction fees.

The other options, while they touch on aspects related to market dynamics, do not accurately represent the core idea of liquidity as understood in trading contexts. For instance, the amount of market participants relates to overall market activity but isn't a direct measure of how easily assets can be traded without price impact. The total number of exchanged tokens helps gauge volume but does not inherently reflect the direct trading ease. Similarly, the length of time assets are held in custody pertains to custody arrangements rather than trading efficiency or market stability.