How to provide liquidity on Pancakeswap and earn passive income?

How to provide liquidity on Pancakeswap and earn passive income

Welcome, in this article we will teach you how to provide liquidity on Pancakedswap and earn passive income.

Pancakeswap is a decentralized exchange (DEX) built on the Binance Smart Chain (BSC).

Pancakeswap is built and operates similar to Uniswap which is the main DEX on the Ethereum network.

Both Pancakeswap and Uniswap utilities the automated market maker (AMM) system which is different from a traditional order book.

In addition to an exchange, it also offers liquidity pools, farming and a predictions market as well as an NFT platform, with more features being added regularly.

This guide will teach you how to trade in and out of liquidity pools.

Also, you will learn how the rewards system works and the potential risks involved.

Pancakeswap Features - Trade, Earn, Win

PancakeSwap launched in September 2020 as a fork of Uniswap. 

Pancakeswap uses the Binance coin (BNB) token in the same was as Uniswap uses the Ether to run.

However, CAKE is the governance token for Pancakeswap.

  • Trade – Use Pancakeswap to trade on a decentralized exchange with very low fees
  • Earn – Stake syrup pools or stake LP tokens in yield farms
  • Win – Lottery, NFT collectibles or Prediction market

In this article, we will focus on how to become a liquidity provider and earn passive income.

Pancakeswap AMM and Liquidity Providing

Pancakeswap is an automated market maker (AMM).

AMM is a type of decentralized exchange (DEX) protocol that relies on a mathematical formula to price assets.

A traditional exchange is using  an order book where an asset is priced according the current sell and buy orders.

However, in an AMM, assets are priced according to a pricing algorithm. This formula can vary with each protocol.

How to connect to Pancakeswap

Since Pancakeswap is a DEX you need a Web3 wallet to connect to Pancakeswap.

Two examples are

Once you have downloaded the extension and created a wallet you can connect to Pancakeswap.

Go to Pancakeswap and click on the “Connect” button in the upper right corner, also seen in the screenshot below.

Now, enter your password for your wallet and you should be connected.

 

connect button - how to connect to pancakeswap

How to provide liquidity on Pancakeswap

Once you have connected to Pancakeswap you can now provide liquidity.

Now, follow these steps

  1. Click on Trade in the right menu
  2. Click on Liquidity in the sub-menu to Trade
  3. Click on +Add liquidity

Now, you should be able to enter what trading pair you want to provide liquidity for.

In the example below, we selected BNB and AUTO.

  • Click Approve 
  • Now, you will need to sign in your Web 3 wallet to you’re allowing to withdraw your AUTO and automate transactions for you.

After you have approved this action in the web3 wallet, you will see a screen like the screenshot below. In the upper right corner you see a transaction receipt.

Now, you can proceed and press “Supply” if you still want to provide this liquidity.

After you have approved this action in the web3 wallet, you will see a screen like the screenshot below. In the upper right corner you see a transaction receipt.

  • Now, you can proceed and press “Supply” if you still want to provide this liquidity.
  • After this, press Confirm in the popup screen you can see in the screenshot below.
  • Click Confirm Supply
  • After you have approved this action in the web3 wallet, you will see a screen like the screenshot below. In the upper right corner you see a transaction receipt.
  • Now, you can proceed and press “Supply” if you still want to provide this liquidity.
  • After this, press Confirm in the popup screen you can see in the screenshot below.
  • Click Confirm Supply
 
  • Now, go to farms in the right menu
  • Click “Approve contract” for CAKE-BNB, as you can see in the screenshot below
  • Once you have clicked, you can now click “Stake LP”
  • Enter the amount you want to stake and sign with your Web3 wallet.

What are the rewards on Pancakeswap as a liquidity provider?

Once, you have staked your LP tokens on Pancakeswap you will earn rewards.

You can keep track on your rewards as a liquidity provider if you navigate to Farms in the right menu.

Here, you will have to look after the pool you have staked. As you see in the screenshot below, there is a toggle to only show staked pools.

Also, you will see how much your staked tokens have earned in real time.

You can also chose to 

  1. Reduce your staked tokens by clicking on the (-) button
  2. Increase your staked tokens by clicking on the (+) button
  3. Harvest your earned tokens

What are the Risks on Pancakeswap as a liquidity provider?

There are several risks involved in being a liquidity provider an a DEX like Pancakeswap.

The risks are

Check documents on Pancakeswap audits to make your own opinion.

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