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  • LP Tokens
  • Liquidity Providers earn trading fees
  • Impermanent Loss

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Liquidity Pools

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Last updated 3 years ago

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When you add your token to a Liquidity Pool you will receive Liquidity Provider (LP) tokens and share in the fees.

LP Tokens

As an example, if you deposited CAKE and BNB into a Liquidity Pool, you'd receive CAKE-BNB LP tokens.

The number of LP tokens you receive represents your portion of the CAKE-BNB Liquidity Pool.

You can also redeem your funds at any time by removing your liquidity.

Liquidity Providers earn trading fees

Providing liquidity gives you a reward in the form of trading fees when people use your liquidity pool.

Whenever someone trades on PancakeSwap, the trader pays a 0.25% fee, of which 0.17% is added to the Liquidity Pool of the swap pair they traded on.

For example:

  • There are 10 LP tokens representing 10 CAKE and 10 BNB tokens.

  • 1 LP token = 1 CAKE + 1 BNB

  • Someone trades 10 CAKE for 10 BNB.

  • Someone else trades 10 BNB for 10 CAKE.

  • The CAKE/BNB liquidity pool now has 10.017 CAKE and 10.017 BNB.

  • Each LP token is now worth 1.00017 CAKE + 1.00017 BNB.

Impermanent Loss

Providing liquidity is not without risk, as you may be exposed to impermanent loss.

To make being a liquidity provider even more worth your while, you can also put your LP tokens to work whipping up some fresh yield on the , while still earning your 0.17% trading fee reward.

🔄
CAKE Farms
“Simply put, impermanent loss is the difference between holding tokens in an AMM and holding them in your wallet.” - Nate Hindman