Learn With STEEM - Understanding Liquidity Pool - How To Provide Liquidity On PancakeSwap

The main purpose of a liquidity pool is to enhance the swapping and exchanging of crypto tokens on time. It is basically a pool of tokens locked up using a smart contract. On the other hand, a liquidity pool maximizes fast crypto swapping or exchange efficiency by reducing waiting time (eliminating order book).

Users that have locked their crypto tokens in the liquidity pool are known as liquidity providers, and they typically receive a share of the trading fee as a reward for providing liquidity.

Trading on centralized exchange platforms such as Huobi or Binance requires a trader to patiently wait for an order book to be filled before his or her open trade is filled. This could be a barrier, as trading a low market cap token can be time-consuming.

Trading token on any centralized exchange will always require another trader to take such a pending order; if no other trader chooses to take it, your trade will remain open/pending for hours or minutes until another trader decides to take it.

For example if you want to sell a token, let say the token is trading at $1 and you want to sell at $1.2 then you would have to wait till a trader that's willing to buy your token for $1.2, this can be monitored using the token order book, simple navigate to the chart of the token click on Order book. Same thing applied to buying token, you simple have to wait for someone to take your order.

The above example shows how trading on a Centralized exchange platform can be time-consuming, especially when trading a low-market cap and low volume tokens.

With the introduction of DeFi and the incorporation of liquidity pools, these barriers were overcome. Using the Automated Market Maker (AMM), traders can instantly swap or exchange tokens of his\her choice without having to wait for an order book to be filled by another trader.

In order to engage in or earn from the liquidity pool, interested users must deposit trading раirs of crypto on the pool, which are often in an equal position i.e the two tokens must be 50-50, for instance you want to provide BNB and BUSD as liquidity, that's you must provide 50% of the BNB and 50% of BUSD, let say you intend to use $100 worth of BNB then you must be ready to provide $100 worth of BUSD too (50-50).

By providing liquidity in one of the crypto-currencies, such as BNB-BUSD, the liquidity provider will begin earning fees from transactions completed with BNB-BUSD. This means that whenever a transaction is completed on the exchange platform using BNB-BUSD, the liquidity provider will earn a the transactions fee of the token provided. In some DeFi platform, the DeFi allow users to stake their liquid token (LP) and in return earn the platform native token. For instance, staking your liquidity token on PancakeSwap allow you to earn the PancakeSwap native token which is CAKE.

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How To Provide Liquidity On PancakeSwap

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Like I previously stated, liquidity simple means adding your tokens to the liquidity pool, and you earn some passive income, this can either be the token you've provided or the platform native token if you choose to stake your liquidity token (LP).

In this case I'll be showing you how to provide liquidity on PancakeSwap, remember to provide liquidity to the pool you'll be need two different tokens, and it will be 50% by 50% for each tokens,so for this post I'll be using BNB and BUSD.

Requirements: you'll be need trust wallet or any wallet that support PancakeSwap, you'll also be needing BSC as fee, this is extremely important.

Now let get started;

Since you've fund your trust wallet with BSC, then open the wallet and select Dapp section, then navigate to PancakeSwap or simply copy and paste this link

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On PancakeSwap landing page, click on the three horizontal lines, and scroll down then select Liquidity, in the next page click on Add Liquidity

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The two token I intend to supply are BNB and BUSD, so I simply select them and enter the amount, remember it should be equivalent, then I select on Approve BUSD and lastly click Supply

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The final step is to confirm the liquid transaction by clicking Confirm Supply, all this will consumed a certain amount of BSC as fee, so it's very important you've enough BSC in your wallet. Then finally wait for the transaction to be successful, and that is it.

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To summarize, trading on PancakeSwap, i.e. buying or selling tokens, will simply make use of the liquidly pool to facilitate the trade, and the transaction will be triggered using Automated Market Maker (AMM) immediately as long as there is enough liquidity in the pool, and the liquidity providers will be rewarded with the transaction fee. This eliminates the need for traders to wait for their orders to be filled and compensates those that have to contribute (provided) their tokens to the pool.

Thank you for reading, see you in my next post.

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