PancakeSwap
Launch App
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  • Welcome to PancakeSwap
    • Product Overview
    • ✨How-to Guides
      • Get Started (BSC)
        • Create a Wallet
        • Get BEP20 Tokens
        • Using PancakeSwap without Centralized Exchanges
        • Connect Your Wallet to PancakeSwap
      • Get Started (Aptos)
        • Create a Wallet
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        • CAKE Bridging Guide
        • Connect Your Wallet to PancakeSwap
        • Aptos FAQ
      • V3/V2 Migration
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        • How v3 APR is calculated
        • FAQ
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      • 🔷[Archive] veCAKE
        • What is veCAKE?
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          • FAQ
    • 📈Analytics (Info Page)
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        • 🧑‍🌾Initial Farm Offerings - IFOs
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        • What can you do as an Ambassador?
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        • Want to be an Ambassador?
        • ❓ FAQs Page
      • General FAQ
        • I need help
        • Troubleshooting Errors
        • What is an Approval Transaction?
        • Fixing Stuck Pending Transactions on MetaMask
    • 👨‍👨‍👦About Us
      • Team
        • The Kitchen Team
        • Become a Chef
          • Brand / Graphics Designer
          • Motion / Interaction Designer
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          • Developer Relations Manager
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          • Business Development Manager
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  • 👴Archive
    • 📂Legacy Products
      • 🖼️[Archived] NFT Marketplace
      • 🎮[Archived] Gaming Platform
        • 📒Brand Kit
        • 🎓Pancake Mayor
        • 🛡️Pancake Protectors
          • FAQ
      • 🍯[Archived] Pottery
        • How to Play Pottery
        • Pottery FAQ
      • 🧈[Archived] Trading Reward
        • How to Participate
          • Top Traders Campaign
          • CAKE Stakers Campaign
        • FAQ
      • 🤝[Archived] Simple Staking
        • How to start Simple Staking
        • FAQ
        • Terms & Conditions
      • 🎯[Archived] PancakeSwap Quest
        • Getting Started
        • How to Join and Complete a Quest
        • Rewards
      • 💧[Archived] Liquid Staking Integration
        • How To Liquid Stake
        • WBETH
          • WBETH FAQ
        • SnBNB
          • SnBNB FAQ
      • 💸[Archived] Options
        • Options Primer
        • CLAMM Options
        • Options FAQ
      • [Archived] CAKE Syrup Pool
        • How to use the Flexible Staking option
        • How to use the Fixed-Term Staking option
    • Old Tokenomics
      • CAKE Tokenomics v1
      • Controlling CAKE supply v1
    • How to Use Farms with BscScan
    • [Archived] Affiliate Program
      • Dashboard & Link
      • Commission Structure and Payment
      • Program Rules & Guidelines
      • Terms & Conditions
  • Trade
    • 🔄Swap
      • Token Swaps
      • How to Trade
      • Fees and Routes
      • Market Maker Integration
      • Smart Router (V2)
        • How to trade using Smart Router
    • ♾️PancakeSwap Infinity
      • Key Features
      • Hooks
        • Dynamic Fee Hook
      • Pool Types
      • Farms
    • 🎯Limit Orders and Twap
      • How to use Limit Orders
      • How to use TWAP
    • 📈Perpetual Trading
      • What is Perpetual Trading?
      • Perpetual Trading V2
        • How can I use it?
        • Dumb Mode
          • Dumb Mode Guide
        • Degen Mode
          • Degen Mode Dynamic Fee
        • MADBTCUSD
          • MADBTCUSD FAQ
        • Perpetuals V2 Glossary
        • Forex
        • Perpetual Trading FAQ
          • Arbitrum
            • ALP Syrup Pool (Arbitrum)
              • ALP Buying & Selling Fees
        • Trading Rewards Program
          • Arbitrum
        • Supported Chains, Modes & Markets
      • Perpetual Trading V1
        • Perpetuals V1 Glossary
        • How can I use it?
        • V1 Perpetual Trading FAQ
    • 🏦Stableswap
      • How to StableSwap
    • 💳Buy Crypto
    • ❓Trading FAQ
      • Swap FAQ
      • v4 FAQ
      • Limit Orders and TWAP FAQ
  • Bridge
    • 🌉Bridging
      • Between EVMs
      • Between EVM and Aptos
      • Wormhole Bridge Guide
    • ❓Bridging FAQ
      • Wormhole Bridge FAQ
  • Earn
    • 🌊Liquidity Pools
      • How to Add/Remove Liquidity
      • ⛏️Pancake Picks
      • Zap
        • Zap (V2)
    • 🚜Yield Farming
      • How to Use Farms
        • How to Use Farms (Legacy)
      • APR/ROI/IL Calculator
      • Farming on Aptos
        • FAQ
      • Crosschain Farming
        • FAQ
    • 🥩Cake Staking
      • 🍯Syrup Pools - Stake CAKE
        • Syrup Pools
    • 🛍️IFO (Initial Farm Offering)
      • How to Participate in an IFO
      • How to Participate in CrossChain IFOs
      • FAQ
      • NFT Profile System
        • How to Set Up an NFT Profile
        • Teams
      • Contract Details
    • ❓Earn FAQ
      • Cake Staking FAQ
        • Syrup Pool FAQ & Troubleshooting
  • Play
    • 🔮Prediction
      • How to Use Prediction
      • AI Prediction
      • Prediction FAQ
      • Prediction Troubleshooting
      • Prediction Mini App
    • 🎟️Lottery
      • How to Play Lottery
      • Lottery FAQ
  • ❓Play FAQ
  • Trading Tools
    • 🛡️PancakeSwap MEV Guard
    • PancakeSwap Auto Slippage
      • How to Set Slippage on PancakeSwap
    • 🔔Notifications
    • ❓Trading Tools FAQ
      • MEV Guard FAQ
  • Protocol
    • 🍰CAKE Tokenomics
    • 📔Governance
      • How to Vote
    • 💻Developers
      • Developer Docs
      • Contributing
        • Codebase Overview
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  1. Trade
  2. PancakeSwap Infinity
  3. Hooks

Dynamic Fee Hook

PancakeSwap’s official Dynamic Fee Hook is designed to create a fairer value exchange between Liquidity Providers and Traders. It protects LPs from excessive impermanent loss (IL) while keeping the market efficient for traders.

Built by the PancakeSwap core team, this hook is tailored specifically to offer a smart, adaptive alternative to conventional fixed-fee models.

🔍 Why Dynamic Fees?

Large Arbitrage trades cause greater price divergence in pools, increasing IL for LPs. Our dynamic fee model charges proportionally higher fees on larger arbitrage trades to offset this risk — while still leaving enough room for arbitrageurs to profit and keep prices aligned.

📊 How Is This Different From Other Models?

Other models in the past have used historical data to estimate volatility, other factors to adjust fees. However:

  • Historical data is a lagging indicator and may not accurately predict future volatility.

  • External market events (like regulatory changes or economic shifts) can render past trends unreliable.

  • Complex, parameter-heavy models risk overfitting — performing well on past data but poorly on new, unseen conditions.

Our approach is simpler, adaptive, and grounded in real-time trading behaviour.

⚙️ How It Works

  • We don’t predict volatility or other macro factors Instead, our model inherently benefits from the behaviour of arbitrageurs under different market regimes:

    • High volatility: More arbitrage trades at larger sizes → Higher fees for LPs, covering a larger share of IL.

    • Low volatility: Fewer, smaller trades → IL is lower by nature, but LPs still earn higher fees than in a fixed-fee model.

  • Our model uses

    • An exponentially weighted pool price to detect arbitrage trades.

    • An exponential fee curve based on the price impact of each swap.

    • A maximum fee cap of 5% to maintain trader fairness.

This ensures fees scale dynamically with trade impact while adapting automatically to changing market conditions.

  • Balanced Incentives Arbitrageurs still retain ~50% of their profits after dynamic fees, ensuring they're motivated to keep pool prices in line with the market.

📌 Key Takeaways

  • No reliance on volatility or other macro factor predictions.

  • Adapts automatically to market volatility based on actual trade behaviour.

  • Protects LPs from IL on a per-swap basis.

  • Maintains strong incentives for arbitrageurs to close price gaps.

  • Benefits traders with deeper liquidity and lower base fees.

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Last updated 20 days ago

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