Pancakeswap Liquidity: Your Complete Guide

As the leading DEX on BNB Smart Chain, PancakeSwap relies on liquidity to allow users to trade coins automatically. In this article, we will cover what PancakeSwap liquidity stands for and how you can play a part in it.

Table of Contents

What is PancakeSwap liquidity?

Built on an Automated Market Maker (AMM), liquidity is a crucial element of the PancakeSwap platform, upon which the entire PancakeSwap exchange system is built. In case you didn’t know, an AMM allows for crypto assets to be automatically transacted. They are used by DEXs to remove any intermediaries in the trading of crypto assets, resulting in lower transaction fees and greater convenience as users can trade directly with the system’s liquidity pools instead of their peers. To facilitate this system, Pancakeswap relies on ‘Liquidity Providers,’ regular users incentivized to add liquidity to PancakeSwap’s liquidity pools.

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What does it mean to add liquidity on PancakeSwap?

Liquidity providers need to add two tokens in equal quantities to a liquidity pool of their choosing. These tokens are locked up for some time and are used in exchanges to allow other users to trade directly with the pool. The draw of adding liquidity on PancakeSwap is the incentives that the platform offers in return. By providing liquidity on PancakeSwap, users can earn interest in the form of additional tokens which are generated from transactions fees. When someone trades with a liquidity pool, there is a 0.2% transaction fee, with 0.17% of that going directly to liquidity providers. In addition, while the tokens are locked in the pool, the Liquidity Providers are given Liquidity Provider (LP) tokens, which can then be used across the PancakeSwap platform to take part in other products such as staking in Syrup Pools.

How to add liquidity to PancakeSwap?

Providing liquidity on PancakeSwap is a rather simple process and can be very rewarding. Once you’ve connected your wallet, follow these steps below to get started:

  • Go to the ‘Liquidity’ page: You can navigate to the ‘Liquidity’ section of PancakeSwap under the ‘Trade’ menu. 
  • Click on ‘Add Liquidity’ 
  • Choose your Tokens: Click on ‘Select a currency’ to see a drop-down menu of available tokens. You’ll be able to select a pair of tokens you want to provide. 
  • Chose the amount: You only need to add this amount for one of the tokens as the other will be automatically calculated to make sure the amounts are balanced. 
  • Review the details: Once you’ve added the tokens and the amount you want, you’ll see some details of the transaction such as your pool share and the current token prices.
  • Confirm the transaction: Once you’ve enabled the transaction and hit ‘supply’ you’ll need to confirm the transaction from your crypto wallet, you may also need to pay some gas fees. 
  1. That’s it! You’ve now added liquidity to PancakeSwap. You’ll be able to see your LP Token balance ad the bottom of the page which you can then use in PancakeSwap’s other products. 

How to lock liquidity on PancakeSwap?

Locking your liquidity on PancakeSwap involves transferring ownership of LP tokens to a time lock smart contract. This is done to prevent liquidity from being taken out from the PancakeSwap liquidity pool for a certain period. To lock your LP tokens, you could build your own time-lock contract, however, this can be quite demanding and risky. Instead, it may be better to lock your LP tokens sing a third-party locker provider which safeguards your LP tokens by employing a time-lock contract that automates the locking process. Once the time-lock period expires, you’d be able to withdraw your LP tokens and then remove your coins from the liquidity pool. 

What is the liquidity provider fee in PancakeSwap?

You won’t be charged any fees to provide liquidity on PancakeSwap other than the gas fees involved in adding tokens from your wallet to the platform. Instead, you will earn tokens from the transaction fees paid by others (a total of 0.17% per transaction). 

What is PancakeSwap farming?

Farming on  PancakeSwap involves trying to get the biggest return possible from cryptocurrency by staking LP tokens in their yield farms. Participating in a yield farm involves users locking up LP tokens for a period of time in the LP token’s corresponding farm. As a reward for locking up their coins, users generate income in the form of CAKE, PancakeSwap’s native governance token. 

⭐️ Read more: How to stake on Pancakeswap?

How to get started with liquidity farming on PancakeSwap?

Once you’ve added liquidity to PancakeSwap and received your LP tokens, you’re ready to start farming and earning more. Follow this step-by-step guide to get in involved with Liquidity farming on PancakeSwap: 

  1. Navigate to ‘Farms’: You will find this under ‘Trade’ in the main menu. 
  2. Choose your farm. Under ‘Farms’ you’ll see a list of active farms. Choose the one you wish to use and click ‘Enable.’ Keep in mind that there are specific farms for specific LP tokens, so make sure the farm you choose accepts one of the LP tokens you hold. 
  3. Choose the amount: The ‘Exchange’ button will be replaced with ‘Stake LP.’ Click this button to be navigated to another page where you can enter the number of LP tokens you wish to stake. 
  4. Confirm the transaction: Once the amount has been entered, a ‘confirm’ button should appear. You’ll need to click this and then navigate to your wallet to confirm the transaction. 
  5. You’re done! After you’ve confirmed the transaction, you should see the details of your newly staked LP tokens. You’re able to add more or remove these whenever you wish.


Is providing liquidity on PancakeSwap worth it?

Since it’s integral to the functioning of PancakeSwap’s exchange, users are heavily encouraged and incentivized to provide liquidity. Liquidity providers are rewarded with both a percentage of all transaction fees (0.17%) as well as LP tokens which they can stake in Farms for greater yield. Since there are limited fees involved in becoming a liquidity provider, we’d say it’s definitely worth giving it a try if you’d like to earn more from your cryptocurrency. 

What does insufficient liquidity on PancakeSwap mean?

The error message ‘insufficient liquidity’ appears when you’re trying to swap a token which means there isn’t enough liquidity to facilitate a trade. There are usually two fixes for this:

  • Change to an older version of the Exchange. 

Some tokens are no longer supported on the V2 version of the exchange which PancakeSwap recently migrated to, but they still work on the V1 version. You can switch between versions easily on the main exchange menu by clicking the ‘V1 (old) option. 

  • Increase your Slippage Tolerance.

There are times when you can’t swap tokens because the slippage tolerance is too low or too high. New coins often have default slippage tolerances that are too low. To fix this, try setting the slippage tolerance on PancakeSwap to 12%. 

Is farming on PancakeSwap safe?

Farming on PancakeSwap is appealing due to the higher amount of rewards you can get compared to partaking in other PancakeSwap products such as Syrup Pools. However, as with all cryptocurrency trades, there are always some risks involved. In this case, the risk is impermanent loss.  Impermanent loss happens when you add liquidity to a pool, and the price of your deposited assets changes from when you deposited them. However, most users still add liquidity and farm their tokens as the benefits gained from transaction fees can make up for any impermanent losses suffered. 

⭐️ Read more: Crypto Staking Risks

We hope that this article helped you become more familiar with PancakeSwap Liquidity and learn how you can contribute to the AMM ecosystem and earn from the staking of LP tokens on PancakeSwap’s farms.  If you’re just getting starting with PancakeSwap and looking for a new coin to trade or provide liquidity for, remember to look out for HI!

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