Adding Liquidity on PancakeSwap and HyperSwap
Last updated
Last updated
To take advantage of the extremely high interest rewards in Jetfuel.Finance’s vaults or farms, you will need to understand how to add liquidity to a decentralized exchange, like PancakeSwap or HyperSwap.
Before I go over how to do that, it is important that we go over what liquidity pools are, how they work, and any risks that you should know about.
What are Liquidity Pools? A liquidity pool is a collection of funds locked in a smart contract. Liquidity pools are used to facilitate decentralized trading, lending, and many more functions we’ll explore later.
Liquidity pools are the backbone of many decentralized exchanges. Users called liquidity providers (LP) add an equal value of two tokens in a pool to create a market. In exchange for providing their funds, they earn trading fees from the trades that happen in their pool, proportional to their share of the total liquidity.
How do Liquidity Pools Work? Liquidity pools are a significant innovation that allows for on-chain trading without the need for an order book. As no direct counter-party is needed to execute trades, traders can get in and out of positions on token pairs that likely would be highly illiquid on order book exchanges.
As I’ve mentioned, a liquidity pool is a bunch of funds deposited into a smart contract by liquidity providers. When you’re executing a trade on a decentralized exchange like PancakeSwap or HyperSwap, you don’t have a counter-party in the traditional sense. Instead, you’re executing the trade against the liquidity in the liquidity pool. For the buyer to buy, there doesn’t need to be a seller at that particular moment, only sufficient liquidity in the pool.
One of the biggest reasons for users adding their funds to liquidity pools, is yield farming or liquidity mining. Liquidity pools are the basis of automated yield-generating platforms like Jetfuel.Finance, where users add their funds to pools that are then used to generate yield.
Distributing new tokens in the hands of the right people is a very difficult problem for crypto projects. Liquidity mining has been one of the more successful approaches. Basically, the tokens are distributed algorithmically to users who put their tokens into a liquidity pool. Then, the newly minted tokens are distributed proportionally to each user’s share of the pool.
What are the Risks Involved? If you provide liquidity to an AMM, you’ll need to be aware of a concept called impermanent loss. In short, it’s a loss in dollar value compared to holding when you’re providing liquidity to an AMM.
If you’re providing liquidity to an AMM, you’re probably exposed to impermanent loss. Sometimes it can be tiny; sometimes it can be huge. Make sure to read Binance's article about it if you’re considering putting funds into a two-sided liquidity pool.
Another thing to keep in mind is smart contract risks. When you deposit funds into a liquidity pool, they are in the pool. So, while there are technically no middlemen holding your funds, the contract itself can be thought of as the custodian of those funds.
With That Said, Lets Add/Remove Liquidity So you understand how liquidity pools work, so lets go over how to obtain LP tokens. I will use the PancakeSwap FUEL/BNB LP B-29 Superfortress vault as an example.
Adding Liquidity You can see in the image above that this B-29 Superfortress vault expects you to deposit FUEL-BNB LP tokens from PancakeSwap, hence the PancakeSwap logo on the bottom. Go ahead and click on the “select” button to enter this vault.
You can see it shows my current wallet balance of 0 FUEL-BNB LP tokens from PancakeSwap, and there is a yellow button at the top right that says “BUY FUEL-BNB LP”. If you click on that button, it will direct you to PancakeSwap to add liquidity (obtain FUEL-BNB LP tokens).
You will need to add an equal $ amount of the two tokens, and a easy way to figure out how much is to use CoinGecko’s conversion tool.
Once you have figured out how much FUEL and BNB you would like to add to liquidity, fill in the amounts in the “add liquidity” interface, and then click on add liquidity. You will be prompted to approve the transactions by your wallet, so go ahead and click on confirm on the prompts. Once finished, you will be shown a section, beneath the “add liquidity” interface, that shows how much LP tokens you now have.
Now that you have FUEL-BNB LP tokens from PancakeSwap, head back over to the B-29 Superfortress Vault.
Your “wallet balance available” will show you how many LP tokens are in your wallet, so go ahead and click on “deposit” and you will be able to deposit those LP tokens and start earning that insane 22,213% APY / 1.493% daily interest.
Removing Liquidity The first thing you will need to do is go to the B-29 Superfortress vault, and click on “withdraw” to retrieve your LP tokens from the vault. Once the transaction goes through, the LP tokens will be in your mobile wallet. Now, to remove them from PancakeSwap’s liquidity pool, you will need to head back over to PancakeSwap, so go to https://exchange.pancakeswap.finance/#/pool.
Your LP tokens will show up under “Your Liquidity”, however in the off chance they don’t, click on “Don’t see a pool you joined? Import it” and it will attempt to import your LP tokens. Once you can see your LP tokens in the “Your Liquidity” section, you will be able to choose “remove liquidity”, and will be presented with a wallet prompt to approve the transaction. Once the transaction goes through, you will now be left with just FUEL and BNB, separately, and can do with those tokens what you wish.
