Liquidity risk is the risk that a stablecoin issuer, redemption mechanism, reserve portfolio, or trading market cannot meet expected flows without material delay, loss, or price impact.
For reserve-backed stablecoins, funding liquidity risk arises when redemption requests exceed the amount of cash or readily monetizable assets available without disruptive sales. Market liquidity risk arises when trading depth deteriorates and transactions move the price materially away from the reference value. The two forms can interact during stress as redemptions, asset sales, and secondary-market price movements reinforce one another.
Liquidity risk concerns the ability to meet flows at acceptable cost and speed. Solvency concerns whether the value of available assets is sufficient to cover liabilities or claims.
Liquidity pressure can turn a loss of confidence into larger redemptions, asset sales, and wider price deviations from the peg.
A reserve portfolio can exceed the nominal value of outstanding tokens yet still face liquidity stress if too little of the portfolio can be converted into cash quickly.